Is Your Qualified Plan Prepared for A DOL Investigation?

The letter reads that there will be a visitor from the Department of Labor (DOL) coming to your business in roughly four or five weeks. The reason for the visit: they have determined they want to investigate your retirement plan(s).

Instantly, you begin to wonder what triggered this audit? Did an unhappy former employee call the DOL? Was your last Form 5500 done properly or did it contain an error you may have overlooked? It could be either of these or it simply might have been some time since the DOL had sent a team of investigators within your geography. Whatever the reason, you have some time to prepare. What should you pay attention to in this prep time and what could the results be of an investigation like this?

Well, here are some statistics to ponder:

• Audits have increased by more than 25% in the past few years.
• 1,000 new enforcement agents have been hired in the past year.
• Three of four audits result in a fine or penalty or both.
• The average fine has increased in recent years by $150,000 to an average of $600,000.
• In the years 2010-2013, an average of 80-100 individuals were indicted each year for offenses related to plans personally.
• In the 2013 audit year, 3,566 audits were performed, and more than $2.7 billion in fines and penalties were levied.

It's a new world in this area and now is not the time to think “this won't happen to us or our plan.”

Get Help

The investigation letter will typically include a checklist of documents and other information the DOL would like you to accumulate for them prior to the appointment. It may look like a laundry list, but it will contain clues as to what may have triggered your investigation. There will also be certain areas that will contain multiple years of information requests. In recent investigations, the new provisions from the Dodd-Frank Act and the Pension Protection Act of 2006 with regard to disclosure and transparency have been added as well as fiduciary requirements that most plan sponsors aren't usually prepared for. It may be a good time to outsource this potential situation to a fiduciary consultant or ERISA tax attorney to help coach you through an investigation situation so you will be prepared for what the DOL is looking for when they come. A fiduciary consultant is different than your investment manager/recordkeeper, your TPA, or your investment adviser. They work independently and don't replace any of the aforementioned professionals. None of the aforementioned groups will typically act as a plan fiduciary and when confronted about the position, they should tell you if they won't do that role. Be very careful when any of your service providers or “plan parties in interest” (attorney, CPA, etc.), tell you that you don't have anything to worry about, and you should be able to handle any fiduciary role or responsibility on your own with their “help.” This is exactly the answer you don't want.

ERISA specifically states that these processes, procedures and compliance should be handled by “prudent experts.” If you are like most plan sponsors, you already have a full-time job working a role within your company or firm, and the 401k plan and its operation is an add-on you or others perform in addition to your other company functions. Many plan sponsors today are outsourcing this role to others. It can be done for the entire plan (Section 402 named fiduciary) or can be done in components (Administration-3(16) fiduciary, Plan Investments Responsibility-3(38) fiduciary, and Participant Communication and Education-3(21) fiduciary). But for the time being, you have the DOL coming in a few weeks. For what should you be preparing?

Vulnerable Areas

Several areas can cause problems for you as a plan fiduciary and for your plan's overall preparedness for an audit or investigation. Let's list areas that are most vulnerable with plan sponsors and their plans.

1. Lack of an Investment Policy Statement or not following provisions of a current one. Approximately 70% of plans today do not have an Investment Policy Statement (IPS). Those plans that do have one seldom follow the instructions the statement provides. The IPS is the guideline for how the plan assets will be invested. It reveals the standards that are to be upheld in selecting, de-selecting and evaluating plan investments. While it is not required by law to have one, it's hard to prove to the DOL that you have a process or procedure with which to follow if you don't have one.
2. Failure to keep plan documents up to date or failure to follow document provisions. This would appear to be a simple example to work with, but plan sponsors typically don't realize how often laws change. Since ERISA came out in 1974, pension law has changed often and substantially. Plan documents and amendments are issued or re-issued every five to seven years and it critical to have the current plan documents and amendments available for the DOL upon audit.
3. Failure to contribute participant contributions in a timely manner. There is a common misconception about the deposit of participant deferrals into the plan. The common interpretation of “timely” has typically been by the 15th day of the following month. The DOL has given a tighter definition to be “as soon as possible.” While this isn't definitive, these elective deferrals should be deposited within the plan three to seven days of being withheld from paychecks or certainly before the next payroll cycle.
4. Paying particular attention to the Form 5500. While many plans don't file a 5500 at all or don't file it in a timely manner, the plans that do typically take too much for granted about how the form is populated by their respective service providers. To assume the 5500 is correct and “signature ready” from the record keeper, CPA or TPA, is incorrect. All levels of pension servicing organizations make mistakes, and those mistakes could trigger an audit.
5. Participant loan and distribution mistakes. Because loans and other distributions mean participant dollars are leaving the plan, this is a particular area of interest for the DOL. Once again, plan sponsors assume that their record keeper and/or TPA handle these situations properly and without issues. Loan terms, repayment methods, number of loans outstanding, and proper qualifying events for hardship withdrawals are all areas that create mistakes and areas of scrutiny by the DOL.

Other areas that can create issues with an audit include: not going out to the marketplace for competitive analysis of plan service providers; not having all plan fiduciaries acknowledge their status in writing; not reviewing the investment lineup for more competitive and efficient investment options; benchmarking plan services; and monitoring all parties receiving compensation within the plan structure and making sure the compensation level is competitive and proper.

A new area of notice involves plans that offer funds and other investments from one service provider exclusively or that contain a requirement for a certain number of proprietary options from a particular record keeper or investment manager. It's doubtful that this approach could pass muster in a well-crafted investment policy statement, nor is it likely that it is feasible that one investment group could offer an entire diverse menu of investments across multiple asset classes that could pass the due diligence of a process that accounted for well researched qualitative and quantitative measurements. It may be convenient and easy to follow this course of action, but it doesn't necessarily follow the due care and due loyalty that a plan fiduciary owes the plan participants.

Some plan sponsors get around this issue by allowing a “brokerage window” within the plan for participants that allows them to place money into any investment they deem appropriate for investment in their account. Two issues that arise from this approach are: 1) do the participants have enough investment education to take part in certain types of investments like ETF's, stocks, and bonds; and 2) if the participant is receiving investment advice from an outside party with respect to this brokerage account within the plan, is that person or entity being disclosed as a plan fiduciary or if they are receiving compensation for this advice, is it being disclosed as well?

Because plans grow over time and plan sponsors “fall asleep at the switch,” plan services and compensation can become dated and stale for the level of pan assets. The DOL takes this area very seriously today and investment advisers are paying back excessive commissions and fees to plans and participants and plan sponsors are being fined in the process as well for being complicit in the situation. When this happens, plan fiduciaries are penalized personally (ERISA Section 409), not in their corporate position. Plan surety bonds, fiduciary liability coverage (normally found as a provision in your Director & Officers policy), and any “fiduciary warranty” typically don't cover these situations fully and should be reviewed and monitored annually to make sure their provisions are adequate, properly worded, and understood.

If you are concerned about these issues and your plan's compliance to them, you can have a private fiduciary audit performed by a fiduciary consultant or ERISA tax attorney to see how you may fare. Many practitioners in this area can be engaged to act as your plan's oversight professional for just such a scenario. The fee for this on an annual basis would be very small compared to the average fee the DOL issues for non-compliance (now up to $600,000) in just a single audit. Certainly in this realm, an ounce of prevention is worth several pounds of cure.

Charles B. Blanton, Jr., CLU, ChFC, AIF, RF, GFS, is a Managing Partner with ECM Group, LLC (www.ecm-group.com).

The letter reads that there will be a visitor from the Department of Labor (DOL) coming to your business in roughly four or five weeks. The reason for the visit: they have determined they want to investigate your retirement plan(s).

Instantly, you begin to wonder what triggered this audit? Did an unhappy former employee call the DOL? Was your last Form 5500 done properly or did it contain an error you may have overlooked? It could be either of these or it simply might have been some time since the DOL had sent a team of investigators within your geography. Whatever the reason, you have some time to prepare. What should you pay attention to in this prep time and what could the results be of an investigation like this?

Well, here are some statistics to ponder:

• Audits have increased by more than 25% in the past few years.
• 1,000 new enforcement agents have been hired in the past year.
• Three of four audits result in a fine or penalty or both.
• The average fine has increased in recent years by $150,000 to an average of $600,000.
• In the years 2010-2013, an average of 80-100 individuals were indicted each year for offenses related to plans personally.
• In the 2013 audit year, 3,566 audits were performed, and more than $2.7 billion in fines and penalties were levied.

It's a new world in this area and now is not the time to think “this won't happen to us or our plan.”

Get Help

The investigation letter will typically include a checklist of documents and other information the DOL would like you to accumulate for them prior to the appointment. It may look like a laundry list, but it will contain clues as to what may have triggered your investigation. There will also be certain areas that will contain multiple years of information requests. In recent investigations, the new provisions from the Dodd-Frank Act and the Pension Protection Act of 2006 with regard to disclosure and transparency have been added as well as fiduciary requirements that most plan sponsors aren't usually prepared for. It may be a good time to outsource this potential situation to a fiduciary consultant or ERISA tax attorney to help coach you through an investigation situation so you will be prepared for what the DOL is looking for when they come. A fiduciary consultant is different than your investment manager/recordkeeper, your TPA, or your investment adviser. They work independently and don't replace any of the aforementioned professionals. None of the aforementioned groups will typically act as a plan fiduciary and when confronted about the position, they should tell you if they won't do that role. Be very careful when any of your service providers or “plan parties in interest” (attorney, CPA, etc.), tell you that you don't have anything to worry about, and you should be able to handle any fiduciary role or responsibility on your own with their “help.” This is exactly the answer you don't want.

ERISA specifically states that these processes, procedures and compliance should be handled by “prudent experts.” If you are like most plan sponsors, you already have a full-time job working a role within your company or firm, and the 401k plan and its operation is an add-on you or others perform in addition to your other company functions. Many plan sponsors today are outsourcing this role to others. It can be done for the entire plan (Section 402 named fiduciary) or can be done in components (Administration-3(16) fiduciary, Plan Investments Responsibility-3(38) fiduciary, and Participant Communication and Education-3(21) fiduciary). But for the time being, you have the DOL coming in a few weeks. For what should you be preparing?

Vulnerable Areas

Several areas can cause problems for you as a plan fiduciary and for your plan's overall preparedness for an audit or investigation. Let's list areas that are most vulnerable with plan sponsors and their plans.

1. Lack of an Investment Policy Statement or not following provisions of a current one. Approximately 70% of plans today do not have an Investment Policy Statement (IPS). Those plans that do have one seldom follow the instructions the statement provides. The IPS is the guideline for how the plan assets will be invested. It reveals the standards that are to be upheld in selecting, de-selecting and evaluating plan investments. While it is not required by law to have one, it's hard to prove to the DOL that you have a process or procedure with which to follow if you don't have one.
2. Failure to keep plan documents up to date or failure to follow document provisions. This would appear to be a simple example to work with, but plan sponsors typically don't realize how often laws change. Since ERISA came out in 1974, pension law has changed often and substantially. Plan documents and amendments are issued or re-issued every five to seven years and it critical to have the current plan documents and amendments available for the DOL upon audit.
3. Failure to contribute participant contributions in a timely manner. There is a common misconception about the deposit of participant deferrals into the plan. The common interpretation of “timely” has typically been by the 15th day of the following month. The DOL has given a tighter definition to be “as soon as possible.” While this isn't definitive, these elective deferrals should be deposited within the plan three to seven days of being withheld from paychecks or certainly before the next payroll cycle.
4. Paying particular attention to the Form 5500. While many plans don't file a 5500 at all or don't file it in a timely manner, the plans that do typically take too much for granted about how the form is populated by their respective service providers. To assume the 5500 is correct and “signature ready” from the record keeper, CPA or TPA, is incorrect. All levels of pension servicing organizations make mistakes, and those mistakes could trigger an audit.
5. Participant loan and distribution mistakes. Because loans and other distributions mean participant dollars are leaving the plan, this is a particular area of interest for the DOL. Once again, plan sponsors assume that their record keeper and/or TPA handle these situations properly and without issues. Loan terms, repayment methods, number of loans outstanding, and proper qualifying events for hardship withdrawals are all areas that create mistakes and areas of scrutiny by the DOL.

Other areas that can create issues with an audit include: not going out to the marketplace for competitive analysis of plan service providers; not having all plan fiduciaries acknowledge their status in writing; not reviewing the investment lineup for more competitive and efficient investment options; benchmarking plan services; and monitoring all parties receiving compensation within the plan structure and making sure the compensation level is competitive and proper.

A new area of notice involves plans that offer funds and other investments from one service provider exclusively or that contain a requirement for a certain number of proprietary options from a particular record keeper or investment manager. It's doubtful that this approach could pass muster in a well-crafted investment policy statement, nor is it likely that it is feasible that one investment group could offer an entire diverse menu of investments across multiple asset classes that could pass the due diligence of a process that accounted for well researched qualitative and quantitative measurements. It may be convenient and easy to follow this course of action, but it doesn't necessarily follow the due care and due loyalty that a plan fiduciary owes the plan participants.

Some plan sponsors get around this issue by allowing a “brokerage window” within the plan for participants that allows them to place money into any investment they deem appropriate for investment in their account. Two issues that arise from this approach are: 1) do the participants have enough investment education to take part in certain types of investments like ETF's, stocks, and bonds; and 2) if the participant is receiving investment advice from an outside party with respect to this brokerage account within the plan, is that person or entity being disclosed as a plan fiduciary or if they are receiving compensation for this advice, is it being disclosed as well?

Because plans grow over time and plan sponsors “fall asleep at the switch,” plan services and compensation can become dated and stale for the level of pan assets. The DOL takes this area very seriously today and investment advisers are paying back excessive commissions and fees to plans and participants and plan sponsors are being fined in the process as well for being complicit in the situation. When this happens, plan fiduciaries are penalized personally (ERISA Section 409), not in their corporate position. Plan surety bonds, fiduciary liability coverage (normally found as a provision in your Director & Officers policy), and any “fiduciary warranty” typically don't cover these situations fully and should be reviewed and monitored annually to make sure their provisions are adequate, properly worded, and understood.

If you are concerned about these issues and your plan's compliance to them, you can have a private fiduciary audit performed by a fiduciary consultant or ERISA tax attorney to see how you may fare. Many practitioners in this area can be engaged to act as your plan's oversight professional for just such a scenario. The fee for this on an annual basis would be very small compared to the average fee the DOL issues for non-compliance (now up to $600,000) in just a single audit. Certainly in this realm, an ounce of prevention is worth several pounds of cure.

Charles B. Blanton, Jr., CLU, ChFC, AIF, RF, GFS, is a Managing Partner with ECM Group, LLC (www.ecm-group.com).