Are you prepared to shell out $500,000 to the Department of Labor in penalties and plan restorations for your retirement plan? You may be unaware that the Department of Labor audits retirement plans and can handout significant penalties. They regularly put out press releases highlighting not only the name of the retirement plan, its named fiduciaries and the recovery made in favor of the participants of the plan. One of those plans was Clark graphics. A federal judge ordered Mary Clark, president of Columbus, Ohio-based Clark Graphics, to restore more than half a million dollars to the company’s two employee retirement plans. The suit alleged that the company’s owners failed in their fiduciary responsibilities as plan trustees by neglecting to monitor the actions of the plans’ administrator. They also failed to review and reconcile the plans’ trust account statements, review participant distribution calculations and require the administrator to issue participant statements.
If you’re like many firms you hire a well-known brand name to handle your plan and stay out of the way unless there’s a complaint. While that has a certain logic, Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi says that will not save you. Contracting with an outside firm to manage those assets does not absolve them of their legal responsibilities. “Employers that sponsor retirement plans have a fiduciary duty to monitor plan assets and ensure they are handled appropriately and protected. Congress made it clear long ago that money set aside for retirement is much too important to mishandle, abuse or neglect, and enacted strict protections with respect to workers’ hard-earned savings.”
The Department of Labor a.k.a. ERISA police
The 401(k) plan was born out of the Employee Retirement Income Security Act (ERISA). The enforcement of the provisions was given to both the Internal Revenue Service and the Department of Labor. The Department of Labor is concerned with helping to promote retirement income security.
Does your 401(k) plan promote retirement income security? Just having a plan does not mean it is promoting retirement income security. Let’s say that an employee saves $5000. Most employees think that all $5000 is being invested for their benefit. However there are fees that must be paid. Unless you are paying for all of the fees of the plan, which would put you in the minority of plan sponsors, only a portion of that $5000 is being invested. Let’s say that your fees are 25%. However instead of charging the fees explicitly, they are taken out in the form of commissions. The equivalent commission is 20%. In that case only $4000 is actually being invested and the other $1000 goes to various service providers. Would the police look kindly on this reduction?
Plans of all sizes get audited by the Department of Labor. Some plans believe that it is only the Internal Revenue Service that audits plans with over 100 employees to use the long form tax filing. The IRS and the Department of Labor are actually looking for different things.
Key Department of Labor Success Factors
- Plan providers being selected and monitored according to a prudent process
- Fees monitored using the 408(b)(2) disclosure to determine fairness
- failed to transmit your contribution to the plan on a timely basis
- Investments being selected and monitored according to a prudent process
- Plan passing compliance tests
- Sponsor meeting fiduciary responsibilities
- Expenses being monitored and checked against industry averages
- Participants making informed investment decisions
- Documentation available showing fiduciary decision-making processes
- Knowledgeable professionals hired for areas where fiduciaries lack the experience and knowledge
Are your contributions passed on to your record-keeping firm in a timely basis? Often that is not the case.
Whether or not you choose to go with a provider that has its own proprietary investments and provides an 800 number financial advisor or one that is skilled for all investment related activities, how do you monitor the investments? Some firms accept whatever the record-keeping provider provides. However, if that record-keeping provider also provides investments, and those are your default choices, how do you know if they are good ones? How does your provider limit your choices? However with the Department of Labor investigator comes in they will want you to show proof that all decisions have been in the best interest of your employees. What proof will you be able to provide?
Can you survive a Department of Labor investigation
In 2011, I cosponsored a similar surviving a Department of Labor investigation with the Department of Labor and the law firm of Wang Kobayashi Austin. After the presentation one of the participants said “that Department of Labor lady scared the H Otto me”. Are you working with retirement plan consultants or specialist 401(k) advisor? The many aspects of the 401(k) plan require a village. I believe it’s best to work with specialist who has access to a set of tools to help you audit your plan.
- Have you used your 408(b)(2) disclosure along with third party data to prove to auditors that the plan fees you authorize your participants to pay is fair and reasonable
- Does your plan use revenue sharing to decrease the company’s costs?
- Have you elected 404(c) provision on your tax filing and don’t know what it means?
- If you know what it means, do you annually monitor it for compliance?
- Have you had formal fiduciary training from an ERISA attorney, Accredited Investment Fiduciary™, Professional Plan Consultant® or other credentialed source?
Based on your answers, should you get the wisdom of a second opinion on your plan management? If not, how much are you willing to pay to settle and what public relations cost from being barred as a fiduciary of an ERISA plan?
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.