With the recent high-profile failures of companies with large employee benefit plans, today’s work force has heightened concern about what employers are doing to protect their retirement assets. Considering the number of 401(k) plans has increased to more than 300,000 covering more than 42 million people, it is easy to see why this issue is a hot one—and why employers should take great care to ensure their plans are well-managed.
Consequences of Mismanagement
Many administrators of employee benefit plans merely process plan information and may not monitor compliance with plan documents, legal or regulatory requirements. As a result of this growth and a perceived lack of fiduciary oversight, the U.S. Department of Labor (“DOL”) has stepped up its enforcement activities dramatically to look for prohibited transactions, delinquent remittances of 401(k) employee contributions and other Employee Retirement Income Security Act (ERISA) noncompliance.
Federal agencies and Congress have adopted tough new rules that place fiduciary responsibility for mismanaged retirement plans in the hands of company directors and officers. The DOL and the Internal Revenue Service (IRS) have the ability to impose sanctions of up to 20 percent of plan assets for failing to manage a plan in accordance with the plan document, the Internal Revenue Code and ERISA requirements. In addition, agencies are working with private plaintiffs to go after individual directors and officers in court when a pension plan collapses.
A high quality audit of a plan’s financial statements can sometimes assist in identifying some of the most common fiduciary, administrative and DOL focus issues.
Common Fiduciary Issues
There are several common fiduciary issues that auditors come across during audits of employee benefit plans.
#1 – Lack of an employee benefit plan committee, or an existing committee that meets periodically but does not record or retain committee minutes of the matters discussed.
#2 – Lack of a written investment policy. With the significant number of investment failures within benefit plans, the complexity of investment alternatives, and the complexity of the tax laws covering the qualifications of the plan and fiduciary responsibilities of the trustees of the plan, it is important that the trustees adequately document the due diligence exercised over operations of the plan (including selection of an investment policy and investment alternatives). The trustees should meet periodically to review the investment performance including returns, soundness, investment managers’ performance, monitor tax and qualification compliance, and approve plan amendments.
#3 – Lack of oversight of third party administrators. Information submitted to the third party administrator should be adequately reviewed and approved by an appropriate level of management. In addition, a plan sponsor must review the procedures performed by the third party service providers on a periodic basis. They also must review reports produced and assumptions made including annual review of the Service Auditors Report (SAS 70). These reports indicate whether controls at the plan sponsor and service providers are operating in a way to ensure timely and accurate processing of plan data and also address any noted exceptions and how those exceptions may affect the plan.
Common Administrative Issues
In addition to the fiduciary issues noted, there are also common administrative errors auditors come across during audits of employee benefit plans.
#1 – Failure to follow the terms of the plan document and/or the plan adoption agreement is the most frequent error. It is very common for the plan sponsor to misapply the definition of eligible compensation and improperly include/exclude bonuses and fringe benefits as well as fail to withhold deferrals from manual checks.
#2 – Not verifying participant eligibility is another source of frequent errors. In these instances, employees may be participating prior to eligibility or may not be informed of their right to participate when they do become eligible.
#3 – Maintaining a fidelity bond or having fiduciary insurance is another area of confusion. The primary purpose of the ERISA-required fidelity bond is to protect the plan against fraud or dishonesty (such as embezzlement from the plan). Therefore, the plan must be the named insured. Usually employee dishonesty policies meet the bonding requirement; however, the plan should be the named insured either in addition to or in lieu of the employer. The purpose of fiduciary insurance is to protect the fiduciaries (for example, the decision makers) from liability. It is possible that fiduciary insurance can qualify as fidelity bonding, but that depends on how the insurance contract is written.
Department of Labor Issues
Two items that the DOL has commonly noted in employee benefit plan audits are late remittances and partial plan terminations. Effective January 14, 2010, employee 401(k) contributions and loan repayments to “small” plans (those with fewer than 100 participants) must be deposited by plan sponsors no later than the seventh business day following the payroll date. Currently, this ruling does not extend to plans with more than 100 participants who are still subject to a shorter timeline which requires the deposit as soon as the funds “may reasonably be segregated,” typically the day after the plan sponsor determines the amount of the withholdings.
Partial plan terminations are potentially triggered if 20 percent or more participants are terminated involuntarily as the result of a plant closure, company downsizing or product line termination and could result in all affected participants becoming fully vested. This termination period could extend over multiple years and many times require the assistance of ERISA counsel in analyzing whether a partial termination has occurred.
Selecting an Auditor
Selecting an experienced auditor for your plan is critical. More than 10,000 CPA firms perform more than 80,000 annual audits of employee benefit plans. However, only 54 CPA firms perform more than 100 plan audits. According to the DOL: “The more training and experience that an auditor has with employee benefit plan audits, the more familiar the auditor will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans.” With that in mind, it is good practice to inquire about the resources of your CPA firm in this unique area prior to a plan audit.
Content contributed by the Charlotte office of Elliott Davis, PLLC, an accounting, tax and consulting services firm providing clients the solutions needed to achieve their objectives in 10 offices throughout the Southeast. For more information, contact Terri McNaughton at firstname.lastname@example.org or Keith Hendrix at email@example.com or visit www.elliottdavis.com.