Ask yourself the following two questions: 1) Is your organization’s retirement plan compliant with the myriad IRS and Department of Labor regulations? 2) Is your organization, as plan sponsor, and your plan trustees, exercising appropriate governance practices?
Retirement plans are a current priority area for audit by both the Department of Labor (DOL) and the IRS. Recent data, with the stock market at record highs, based on our inflated money supply and our economy as the “best of the worst on the global,” reports that U.S. retirement assets are at $19.4 trillion and represent 36 percent of all financial household assets. As a nonprofit organization, you most likely have a 403(b), 401(k), defined contribution, or defined-benefit plan. There are currently more than 500,000, 401(k) plans covering about 60 million employees in the U.S.
Retirement Plan compliance is an area that does not always receive an appropriate amount of monitoring from the employer’s perspective. If you need proof, consider the following companies and the penalties they incurred for their failure to exercise due diligence:
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§ ABB – $36 million
§ General Dynamics – $15.2 million
§ Bechtel – $18.5 million
§ Merrill Lynch – $13.5 million
§ Caterpillar – $16.5 million
§ Kraft – $9.5 million
Believe me, if you pay attention to the following top 10 list, you will be most likely able to avoid penalties for failure to exercise proper governance and due diligence with respect to your retirement plan.
1) Your first cardinal rule is to be sure that you call a professional accountant or attorney with extensive expertise in the area of retirement-plan compliance.
2) I am hopeful that, at this point, your board or audit/finance committee meets at least once each year with your independent auditors for your tax-exempt organization. Your retirement-plan auditor should also meet with the retirement plan governance committee (e.g., plan trustees) to review and discuss plan audit results. This group should also receive a management letter regarding internal controls and regulatory compliance matters, if appropriate.
3) For retirement plans that provide for employee contributions, are you certain that the amounts are deposited in plan assets within the 7-day safe harbor period, as required?
4) Is your retirement plan in compliance with the recently adopted investment related fee disclosures by providing all required fee disclosures to plan participants? The final regulations in this area can be found at IRS Code Section 2550.404a-5.
5) To comply with the Section 404 regulations, retirement plan fiduciaries must discharge their duties with respect to the plan prudently and solely in the interest of participants and beneficiaries. At a minimum, this requires disclosure of specific plan-related information (e.g., administrative expenses) and investment-related information (e.g., investment fees and expenses).
6) Plan fiduciaries should be aware of the following:
§ Simply receiving and passing on disclosures isn’t enough, due diligence must be conducted and documented.
§ Using existing service providers to conduct due diligence involves inherent conflicts of interest and should be avoided.
§ Benchmarking fees and expenses alone are generally not adequate to determine reasonableness.
§ Plan sponsors subject to these Section 404 regulations that have not issued an RFP in more than three years, should do so.
7) Plan sponsors, and most plan advisors, are not in a position to properly manage Section 404 disclosure requirements due primarily to the complexity of fee arrangements and lack of appropriate expertise.
8) The IRS will be issuing a new 401(k) Questionnaire Self Audit Tool (QSAT) in 2013. The QSAT is designed to help plan sponsors find, help, and avoid costly mistakes. Additional information can be found at http://www.irs.gov/pub/irs-tege/401k_final_report_phoneforum_presentation.pdf.
9) In March 2013, the IRS issued the results of its 401(k) Compliance Check Questionnaire Survey based on responses from 1,200 randomly selected plan sponsors. You should read this report, including the plethora of statistics developed from survey responses.
10) Finally, if you are one of the dwindling numbers of employers that sponsors a defined-benefit retirement plan, please review it to determine whether the plan is sustainable and affordable for your organization. In the past 20 years, the number of employees covered by a defined benefit plan has declined from 62 percent to 7 percent! This is primarily due to the relative lack of predictability (e.g., mortality rates, investment return, compensation increases, and turnover rates) in comparison to the discretionary flexibility that exists in defined contribution plans (e.g., 401(k), 403(b), etc.).
Finally, the IRS has a review checklist and examples of some of the most common errors made, together with appropriate correction methods. This can be found at www.irs.gov/pub/irs/tege/401k_mistakes.pdf. The DOL also has an informational web page related to its Voluntary Fiduciary Correction Program at www.dol.gov/ebsa/newsroom/fs2006vfcp.html.
One of the recurring themes resulting from my early days with the Boy Scouts seems to directly apply in the area of retirement plan compliance. That is to say, “Always Be Prepared!”
Gerald J. Archibald, CPA, is a partner in charge of the management advisory services at The Bonadio Group. Contact him at garchibald@bonadio.com