Author Archives: thepricecompany

DOL Outlines Benefit Plan Audit Deficiencies

Too many employee benefit plan audits are deficient, finds a new report from the U.S. Department of Labor, putting up to $653 billion and 22.5 million plan participants and beneficiaries at risk.

More than 7,300 licensed CPAs nationwide audit more than 81,000 employee benefit plans. The Employee Benefit Security Administration’s review found that while 61% of audits fully complied with professional auditing standards or had only minor
deficiencies under professional standards, the remaining 39% of the audits contained major deficiencies.

I can’t say I’m surprised, says Danielle Capilla, chief compliance officer with United Benefit Advisors. DOL audits deal with a complicated area of law where there’s a lot of nuance. So it’s very easy for someone to make a mistake that is then compounded over the years.

Moreover, she says, the Affordable Care Act further complicated the waters as it relates to the law surrounding benefit plans.  It gives plans more areas to make mistakes. It’s kind of low-hanging fruit [for the DOL] to a certain extent.

Documentation errors are one of the most common issues face during a DOL audit, says Capilla. So much documentation is required, some might be one page, some might be binders, and when you have to keep track of that much documentation every year, it’s really easy to misplace one or not have it stored in the right place.

Another common trip-up for employers is the wrap document that accompanies the insurance carrier’s certificate and contains all the ERISA language. Not having one, or having one that’s poorly crafted and is missing information, is also an issue Capilla says she sees.

It’s not a matter of if, but when, employers will get notice of a DOL health plan audit, maintains a recent white paper from UBA. In fact, a DOL audit is so significant that once a company is embroiled in the audit process, that should be their top priority, says the paper, Don’t Roll the Dice on Department of Labor Audits.

And while every audit will be different, the process will go much more smoothly if plan sponsors are prepared ahead of time, says Capilla.  Remain calm and notify everyone who needs to be notified in your company, as well as your attorney, broker and insurance carrier, she advises. And make sure the people who are responding to the audit have ample time and ability that their calendars are cleared and that they have the bandwidth to jump through all of the hoops necessary. The quicker you can get
through it, the better for everyone.

Capilla also recommends doing an internal audit, which may reveal areas for improvement, and creating an audit action plan.  Doing so will put you in the best seat should the live letter arrive in your inbox.

In addition to increased outreach to CPAs and enforcement of audit standards by EBSA, the DOL report proposes legislative fixes. It recommends that Congress amend the Employee Retirement Income Security Act definition of qualified public accountant to include additional requirements and qualifications necessary to ensure the quality of plan audits. Under the proposal, the Secretary of Labor would be authorized to issue regulations concerning the qualification requirements.

The American Institute of CPAs said in a statement that its “overarching goal has been and continues to be helping individuals and firms perform the highest quality employee benefit plan audits possible. We will work with auditors, plan sponsors, state CPA licensing boards and the Department of Labor to accomplish that.

The DOL report also urges Congress to repeal the ERISA limited-scope audit exemption and give the secretary the authority to define when a limited scope audit would be an acceptable substitute for a full audit. When auditors have to issue a formal and
unqualified opinion, they have a powerful incentive to rigorously adhere to professional standards ensuring that their opinion can withstand scrutiny. The limited scope audit exemption undermines this incentive by limiting auditors obligations to stand
behind the plans financial statements.

Finally, the report suggests ERISA be amended to give the Secretary of Labor authority to establish accounting principles and audit standards to protect the integrity of employee benefit plans and the benefit security of participants and beneficiaries. The existing patchwork of regulations and rules needs to be overhauled and a meaningful  enforcement mechanism needs to be created, says Phyllis C. Borzi, assistant Secretary of Labor for employee benefits security. The department is proposing, among other measures, legislation that will fix these problems.

Source: Andrea Davis, Employee Benefit News

Clients Getting Divorced may Encounter Hidden 401(k) Fees

Getting a record keeper to fill out a legal document needed to divide a retirement account could cost more than $1,200.

A profit center. A silent fee. One more kick in the pants.

Those are a few of the ways divorce lawyers describe the fee that many 401(k) plan participants have to pay when they need to divide a retirement account in a divorce. As more wealth accumulates in defined-contribution plans and divorcing baby boomers move to split it up, more retirement savers are getting to know a little abbreviation that packs a big punch in frustration and exasperation.

The fee is for processing a qualified domestic relations order to transfer assets in a defined-contribution account. Some employers don’t charge separately for the QDRO — the fee may be built into the plan’s costs and, ultimately, spread across all your colleagues.

But when a third party such as Fidelity Investments or Vanguard Group handles the administrative and record-keeping details of a 401(k) plan, the QDRO fee charged to participants can start around $300, jump quickly to about $700, and stretch to $1,200 and beyond. That’s on top of what you’re paying the lawyer who prepared the form for the plan to approve and process.

One way record keepers can “enhance profit margins, while remaining competitive on record-keeping charges, is to charge bloated transaction fees to participants,” said Carl Engstrom, an attorney with Nichols Kaster, which has filed excessive-fee lawsuits against plan sponsors, the companies offering the 401(k) to employees. “While QDRO processing fees may seem like an oddball or niche issue, this problem raises issues that echo many of the same themes that we keep hearing in recent 401(k) litigation.”

Plan sponsors can wind up in the legal cross hairs for allegedly breaching a fiduciary duty by not negotiating for lower fees. The litigation has focused mostly on investment fees and overall record-keeping costs, not on items like QDRO fees.

QDROs are “like a cash-printing machine for plan administrators,” said Emily McBurney, an Atlanta-based lawyer who has specialized in QDROs for 16 years. Plans can essentially charge whatever they want, she said, and “no one can go up against the big record keepers to say that the amount is not reasonable, so people are trapped.”

There are tangled agendas here. Class-action lawyers may smell a potential suit alleging excessive transaction fees. Divorce lawyers say the Fidelitys of the 401(k) world are overly rigid in the language and format they require. Third-party QDRO experts, the attorneys’ competitors at times, say many lawyers don’t know the ins and outs of the laws surrounding tax-advantaged retirement benefits and QDROs. And when a plan administrator gets a QDRO that doesn’t have the right language, it goes right back to the lawyers.

Guess who pays for their time.

A QDRO fee of $500 to $1,000 is reasonable, said Stephen McCaffrey, chairman of the legal and legislative committee for the Plan Sponsor Council of America. He cites the administrative complexities of QDROs, which fall under the Employee Retirement Income Security Act of 1974. In a 2015 survey by Aon Hewitt of 367 plan sponsors, the percentage saying participants were directly charged a QDRO transaction fee was 55% in 2015, up from 25% in 2009.

Mr. McCaffrey said divorce lawyers “rail against this because they don’t have a clue about what needs to be done and the time it takes to do it. I suspect it’s not a profit center for the big record keepers.”

Source: Bloomberg News

5 Signs of 401(k) Trouble

A recent report highlights five key 401(k) risk areas that advisors might want to keep an eye on.

The report by ThinkAdvisor was based on an assessment of 19 “red flags” gleaned from Form 5500 filings by Judy Diamond Associates.

Here are the five warning signs:

Inadequate Fidelity Bond Coverage:

More than 70,000 sponsors of 401(k) plans are carrying insufficient levels of fidelity bond insurance, according to data mined from Judy Diamond Associates Retirement Plan Prospector tool. It was, in fact, the top red flag in JDA’s most recent analysis, according to the ThinkAdvisor.  A recent NAPA Net reader poll found that just over half (53%) of respondents said that fiduciary insurance/coverage levels were not only a factor in their current RFP process, but were a growing one.  About a quarter (27%) said that it was a factor, while the remaining 20% said it wasn’t.

Reduced Employer Contributions:

The JDA analysis noted that 32,354 plans experienced reduced employer contributions, noting that when employers reduce, or eliminate matching contributions, it is often an indication that the sponsor is in financial trouble, though there are certainly any number of alternative, less gloomy rationales for that result.

Corrective Distributions:

According to the most recent available data from the Labor Department, a significant portion of the 401(k) universe (57,410 plans, according to Judy Diamond) issued a corrective distribution under the IRS’s nondiscrimination test, which ensures that elective and matching contributions for rankandfile employees are proportional to contributions from business owners, managers and other highly compensated employees. While it might not be signs of a real problem, it might suggest an opportunity for a better scrutiny on an interim basis, so that HCEs aren’t forced to deal with the complications frequently associated with these corrective distributions.

A History of Corrective Distributions:

Having to make a corrective distribution one year is one thing – but doing so on an ongoing basis could be indicative of a more serious problem. The JDA analysis noted that 28,251 plans showed a “history” of having to make corrective distributions.

Retirees Leaving Money in the Plan:

Arguably this is not necessarily a problem – indeed, the Labor Department has suggested that this would be a positive outcome from the fiduciary regulation, and researchers have opined that this would, in fact, be a consequence. That said, Judy Diamond notes that 56,275 plans had a “high percentage” of retirees with assets still in the plan, which the report notes means that the plan continues to pay administrative costs on those assets, which can increase overall plan expenses.

Source: NAPA Net

Using a Qualified Retirement Plan or IRA to Buy Real Estate

Thinking of using a Qualified Retirement Plan or IRA to invest in a rental property?  It may not be the best option.  If you borrow to finance the property, you’ll run into the unrelated business taxable income rule, which could require you to pay hefty taxes on your rental income on profits as they are earned inside the Plan/IRA.  And you’ll be prohibited from claiming landlord-friendly tax breaks for depreciation, property taxes, and other expenses.  Instead, consider investing in a real estate investment trust (REIT) in your Plan/IRA.  REITs are required to return at least 90% of taxable income to shareholders, so dividends are typically generous.

 

SOURCE: Kiplinger’s Personal Finance Advisor, November 2016

Money Purchase Plan Loan Questioned by EBSA

According to EBSA, the SeaBoard Management money purchase plan trustees breached their fiduciary duties by failing to take action to recover funds owed to the plan, which were loaned in violation of ERISA.

SeaBoard Management Inc., a company based in Stevenson, Maryland, is facing a court challenge from the Department of Labor’s (DOL) Employee Benefit Security Administration (EBSA) for breaching the Employee Retirement Income Security Act (ERISA).

According to EBSA, the SeaBoard Management money purchase plan trustees Larry Porter and Susan Porter breached their fiduciary duties to the plan by failing to take action to recover funds owed to the plan, which were loaned in violation of ERISA. To date, principal and interest owed to the plan on this loan is approximately $332,544, according to EBSA.

“The trustees failed to take action to recover funds owed to the plan that were loaned to Waskey Investments, a real estate partnership in which Larry Porter owned a 50% share, in violation of the Employee Retirement Income Security Act,” the complaint states. “To date, principal and interest owed to the plan on this loan is approximately $423,486.”

EBSA is asking the U.S. District Court for the District of Maryland to restore all related losses, including interest or lost opportunity costs to the plan, which occurred as a result of the defendants’ breach of their fiduciary obligations. Further, EBSA wants to permanently enjoin Larry Porter and Susan Porter from serving as a fiduciary, administrator, officer, trustee, custodian, agent, employee, representative, or having control over the assets of any employee benefit plan subject to the ERISA—and to appoint an independent fiduciary at the Porters’ expense.

Source: http://www.plansponsor.com/Money-Purchase-Plan-Loan-Questioned-by-EBSA/

IRS has Opened Up an Employee Plan Compliance Project on SIMPLE IRAs

The IRS has opened up an employee plan compliance project on SIMPLE IRAs; it’s eyeing whether employer with SIMPLE IRAs are eligible small businesses…those with 100 or fewer employees.  The agency is mailing questionnaires to firms that both sponsor SIMPLE IRAs and filed over 100 W-2s for at least two consecutive years between 2012 and 2014.  Failing to respond to the letters could lead to an audit.

Source: The Kiplinger Letter, November 18, 2016

Big Changes to the IRS’s Determination Letter Process

Big changes are coming to the IRS’s employee plans ruling program next year.  Under current procedures, sponsors of individually designed employee plans can seek a determination letter from the IRS every five years to ensure the plan is in compliance with all current laws and regulations.  This helps give sponsors certainty that their plans are up-to-date and continue to meet the rules from employee plan qualification.

The IRS will generally stop ruling on amendments to individually designed plans beginning in 2017, absent special circumstances such as significant law changes and new approaches to plan design.  Sponsors will only be allowed to request determination letters from the IRS on the plan’s initial qualification and upon termination.  After these restrictions were first announced last year, retirement plan professionals pleaded with the IRS to backtrack on the changes, but to no avail.

Source: The Kiplinger Tax Letter, July 29, 2016