As we have all read, almost every day it seems like large plans are being targeted for paying excessive fees, causing harm to participants by reducing their likelihood of achieving the best possible returns. These include accusations in several different areas. Some examples are misuse of the vendor’s more expensive proprietary funds; including stable value investments with undisclosed interest spread earnings that pad the insurance company’s pockets, or retaining retail share classes to paying recordkeeping fees that are asset based. All of these hurt the participant in the long run and should be addressed.

However, one area that seems to be flying under the radar is Department of Labor (DOL) audits. It is unlikely that the Schlichter Bogard & Denton law firm will focus on audit failures since the pool of available settlement dollars is typically significantly smaller. The DOL, however, will be most happy to collect any monies they can get from these failures. One might ask what is causing the increase in DOL investigations. The following statistics most likely answers that question;

  1. In 2014, 65% of retirement plans investigated by the DOL resulted in monetary penalties despite the best intentions of the majority of retirement plan administrator’s efforts to run the plans within the applicable guidelines.
  2. In April/May of 2015 the DOL released a study that highlighted a need for improvement in audits of employee benefit plan financial statements. The study found that 61% of the audits fully complied with audit standards or had minor deficiencies, but one or more major deficiencies were found in 39% (up from 33%) of the 400 audits included in the study. 

We should not forget that our federal government is in a revenue generating mode. Our federal deficit is above $18 trillion and grows larger every day. In their minds the assets in these retirement plans have not been taxed and make a natural target.

What can advisors and plan sponsors do? The best way to survive a DOL audit is to make sure that the plan is being managed prudently, in accordance with ERISA and the governing plan documents. All applicable plan provisions should be reviewed regularly and any changes made well documented. The DOL has always provided guidance on where they’ve found common issues and will continue to do so. Advisors and sponsors should be aware of those areas to make sure they are in compliance within their respective plan provisions. The top handful of issues lately are; the timing of employee deferrals and when they are deposited into the plan, the definition of compensation; whether or not the proper compensation being used for deferrals and any applicable employer match, eligibility – are participants provided the opportunity to participate when eligible, and hardship distributions – is the proper documentation in place that supports the approval of the distribution. Another best practice is to make sure the sponsor has all of the plan’s 408(b)(2) disclosures, documented that they have been reviewed and are understood.

Finally for plans that are required to be audited annually, a best practice is to apply due diligence criteria to the CPA firm that is selected to complete the audit. The DOL stated that the smaller CPA firms (76%)…firms that performed one or two ERISA audits per year had the most major deficiencies within the plan audits. Some of the criteria that should be considered with a potential auditing firm are; How many employee benefit plan audits are done each year?, What type of annual ongoing specific training is completed each year?, Is the employee benefit plan audit work periodically subjected to peer review by another CPA with experience in employee benefit plan audits?

The dollar amount of any minor or major deficiency of a DOL investigative failure may not ever be as large as the excessive fee cases we have seen lately, but if any deficiencies are discovered, the work involved to fix them can be very time consuming and disruptive to the plan sponsor. If any deficiencies exist and can be discovered prior to a DOL discovery, the self-correction route is a much better way to go. By the way, for the plans we convert into our company each year close to 80% have some sort of deficiency that we need to correct so we can have the plan audit ready.

As I have told my three teenagers over the years, if you own up to a mistake there is still a punishment, just not as severe as the punishment if you were trying to hide the mistake and you get caught.

About Lee Topley view all posts

Lee Topley is the Managing Director for the Retirement Plan Consulting Group at Unified Trust Company and has more than 30 years of experience in the retirement services industry. He is responsible for the management and oversight of the overall business strategy for the Retirement Services Line of business. He also serves as a member of Unified Trust Company’s Trust Executive, and Trust Investment Committees, where he participates in formulating and administering company policies and developing long-range goals and objectives.