An army of federal labor agents is on the march this year, looking for non-compliant retirement plans and ready to hit their sponsors with major fines for their failings.
The moves are a follow-up to the U.S. Department of Labor’s intensifying effort to target small- to mid-size 401(k) plans for review.
The government is seeking 23 points of compliance from administrators, who risk stiff fines if they cannot show proof that they’ve follow regulatory obligations.
Most plan managers who receive letters are told they have 10 days to respond to the government’s request or risk an audit, said Larry Lexow, of Lexow Financial Group in Edwardsville, which has been holding a series of free seminars on the changes.
An on-site audit can be a majorinconvenience, he said.
“It can be two days to a week, reviewing payroll documents, contribution documents and plan documents, looking for failure to comply with regulatory operations of the plan,” Lexow said.
The most common shortfalls of plan administration:
- Failure to send in contributions in a timely manner. They must be submitted to the plan within 10 working days after they are withheld.
- Not conforming to plan documents. For instance, failing to notify potential participants of eligibility.
- Failure to properly spell out fees involved in administration of the plan. Department of Labor requires trustees to file an annual, Internal Revenue Service 404 (a) (5) notice, spelling out fees involved in the plan. Trustees must be knowledgeable of the fees so they are not paying too much.
- Failure to provide participant education annually.
New this year is the need to file a Restatement of Plan document, at this juncture believed to be needed in April, Lexow said. All plan managers will go through document restatement, reviewing regulations and more to make sure they are current. Such a restatement is good business practice, he said.
The 23 points enumerated by the Department of Labor are a potpourri of fiduciary responsibility. Even the simplest point is a paperwork challenge — sending in a copy of the current plan document and all amendments. But the demands have the potential to be quite cumbersome, including requests for years worth of records.
Several large employers — John Deere and Anheuser-Busch InBev among them — have gotten caught up in employee lawsuits in recent years, challenging purported violations of the Employee Retirement Income Security Act of 1974, known as ERISA. Title I of that act establishes standards governing profit sharing and other operational aspects of benefit plans.
“Certainly participants are becoming aware (of shortfalls) and filing suit, but Department of Labor is driving it, making sure that employers are in compliance. We’ve been doing this over 20 years and they’ve never been so outspoken,” said Lexow, a Chartered Retirement Plans Specialist.
In October, Labor issued notice that it would require plan trustees to have annual fiduciary training. A fiduciary, who must act in the best financial interest of participants, can be an employer, human resources person or chief financial officer. It’s not unusual in small companies for the same person to be wearing all hats.
“Probably nine out of 10 (plan trustees) don’t recognize they are fiduciaries and require such training,” Lexow said.
His company has been holding a series of free seminars for plan administrators, hoping to spread the word to get them ready for Labor’s call.
He uses one example of a client, a smaller plan with six employees, that was audited.
“Department of Labor spent three days going through records. The only thing they could find is that the employer was also the person handling the records, and they found him out of compliance during his vacation periods.” In other words, no one was submitting records in a timely fashion during his absence. The resulting interest and fines was $800.
“Most of the fines went to the employer since he was also a plan participant, but the real key was he lost three days of sales,” Lexow said.
Fines and/or plan reimbursements are a central enforcement action. The Secretary of Labor has the authority under section 502(c)(2) of ERISA to assess civil penalties of up to $1,100 a day against plan administrators who fail or refuse to file complete and timely annual reports.
The Department of Labor has some specific fines defined as per occurrence or dollar amount involved, which are reduced if the plan sponsor catches the failure and files under what is called the Delinquent Filer Voluntary Compliance Program. These fines and penalties go to the Department of Labor or the Internal Revenue Service. Make up of lost interest, earnings and contribution would go directly into the plan.
Only one in four retirement plans audited in the last few years has gotten a passing grade.
ERISA is designed to protect the assets of millions of Americans so that funds placed in private industry retirement plans during their working lives will be there when they retire. ERISA does not require an employer to establish a retirement plan. It only requires that those who establish plans meet certain minimum standards.
“In the past few years, the U.S. Department of Labor has intensified its efforts to promote compliance among retirement plan sponsors,” Lexow said. “Through its enforcement of the Employee Retirement Income Security Act in FY 2013, the DOL collected over $1.6 billion in plan restorations, fines and penalties from retirement plans.”
In their seminar, Lexow and colleague John Graney Jr., an Accredited Investment Fiduciary and Registered Fiduciary, review compliance measures such as: holding an annual investment committee meeting; filing an annual IRS Form 5500; and making sure loans comply with plan provisions.
“In FY 2013, the DOL completed 3,677 civil investigations,” Graney said. “Of these, 72.8 percent culminated in monetary results on average of $450,000 per plan.”