DOL Survival Guide and Top Ten 401(k) Pitfalls · DOL Survival Guide and Top Ten 401(k) Pitfalls...

D O L S u r v i v a l G u i d e a n d To p Te n 4 0 1 ( k ) P i t f a l l s

Presented by CohnReznick’s Government Contracting Industry Practice

Sandy Wendler, Manager and Travis Dutton, Principal, Lockton

Retirement Services

P L E A S E R E A D

This presentation has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.

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A G E N D A

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Ten Steps to Good Fiduciary Management

Top Ten 401(k) Pitfalls

Surviving a DOL Investigation

Obligations Under the New Service Provider Fee Disclosure

Regulations

Participant Fee Disclosure Regulations

S T E P 1 : U N D E R S TA N D Y O U R E R I S A F I D U C I A R Y D U T I E S

• Exclusive Purpose Rule (Duty of Loyalty) – only interest is providing

benefits to participants/beneficiaries

• Prudent Person Standard (Duty of Care) – discharge your duties in the

manner of a prudent person with the care, skill, prudence and diligence of

a person acting in a like capacity and familiar with such matters (Prudent

expert)

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S T E P 1 : U N D E R S TA N D Y O U R E R I S A F I D U C I A R Y D U T I E S

• Diversification – minimize the risk of large losses

• Follow the terms of the plan

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S T E P 2 : A R E Y O U A N E R I S A F I D U C I A R Y

• Investment Fiduciaries arise from:

• Exercising discretionary authority or control over the management of the plan’s

assets

• Someone who renders advice for a fee 3(21)

• Someone designated 3(38)

• Fiduciary Acknowledgement Form:

• A Fiduciary Acknowledgement Form

• Look at your actions, not your job title

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S T E P 3 : C R E AT E A N I N V E S T M E N T F I D U C I A R Y F I L E

• Plan Documents

• Government/Regulatory Requirements and Communications

• Journals and Ledgers – Section 404c Compliance

• ERISA Fidelity Bonds

• Participant Communications Files

• Third Party Service Provider Contracts (Bids and Proposals)

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S T E P 3 : C R E AT E A N I N V E S T M E N T F I D U C I A R Y F I L E

• Plan Procedures and Minutes of Meetings

• Investment Policy Statements

• Committee Minutes

• Investment Reviews

• Participant Education Materials

• Loan Activity Reports

• Procedure Materials

• IRS Form 5500s and Schedules with Audit

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S T E P 4 : R E V I E W Y O U R F I D U C I A R Y F I L E

• Questions the Fiduciary File must answer:

• Who are the trustees and named fiduciaries?

• Is the plan 404c compliant and how?

• Do you clearly understand the plan expenses and articulate why they are

reasonable?

• What is your formal process for decision making?

• What is your formal process for investment decisions?

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S T E P 4 : R E V I E W Y O U R F I D U C I A R Y F I L E

• Is there a clear paper trail for your decision making?

• Who has the authority to make decisions?

• Do the trust documents prohibit any asset choices?

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S T E P 5 : S T E P S T O M I T I G AT E Y O U R R I S K

• What does this mean?

• Reduce the probability of a breach

• Reduce the consequences of a breach

• How can you do it?

• Create and follow an investment policy statement

• Build and run an effective investment committee

• Select and monitor your advisors

• Follow 404c

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S T E P 5 : S T E P S T O M I T I G AT E Y O U R R I S K

• Shift the risk where you can

• Educate your fiduciaries

• Consider purchasing insurance

• Make use of a Qualified Default Investment Alternative (QDIA)

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S T E P 6 : F O L L O W Y O U R I N V E S T M E N T P O L I C Y S TAT E M E N T

• Your Rulebook – you will be measured against this:

• Assists in avoiding questionable investment in turbulent times

• Communicate purpose with trustees, service providers and the investment

committee

• Defines the roles of the trustee, advisor, custodian and investment manager

• Designates who has a fiduciary role

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S T E P 6 : F O L L O W Y O U R I N V E S T M E N T P O L I C Y S TAT E M E N T

• Sets investment objectives and goals of the plan

• Defined due diligence criteria for selecting investment options

• Standards and benchmarks of investment performance to which the assets

are compared

• Procedures for monitoring investment expense

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S T E P 7 : B U I L D A N E F F E C T I V E I N V E S T M E N T C O M M I T T E E

• Consider a Charter:

• Establishes a purpose

• Defines roles

• Delegates responsibility

• Sets membership

• Organizes meetings

• Notice of duty

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S T E P 7 : B U I L D A N E F F E C T I V E I N V E S T M E N T C O M M I T T E E

• Who should serve?

• HR, Finance, Operations, Legal, Accounting

• Someone should have an understanding of capital markets, such as a CEO or

CFO

• Financial advisor should always attend in a non-voting role

• Odd number – 3 to 5 (not too large)

• Permanent (CEO or HR VP) and non-permanent (rotated in staggered years)

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S T E P 7 : B U I L D A N E F F E C T I V E I N V E S T M E N T C O M M I T T E E

• Educate new members on the plan and ERISA

• acknowledge participation

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S T E P 8 : R U N A N E F F E C T I V E I N V E S T M E N T C O M M I T T E E

• How many meetings?

• 2 to 4 per year

• Set an agenda

• Appoint a chair

• Consider having legal counsel present

• Keep minutes and document deliberations

• Could you recall these events in two years if asked?

• Distribute materials in advance

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S T E P 8 : R U N A N E F F E C T I V E I N V E S T M E N T C O M M I T T E E

• Retain materials and reports in the Fiduciary File

• How will communications flow to the Plan Sponsor or Plan Administrative

Committee?

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S T E P 9 : S E L E C T A N D M O N I T O R Y O U R A D V I S O R S

• This is your expert, but you can’t wash your hands:

• Review your expert and the information they provide

• Review your service agreement and fee structure to reasonableness/necessity of

services

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S T E P 9 : S E L E C T A N D M O N I T O R Y O U R A D V I S O R S

• Document – how have your selected and monitored?

• What are their credentials?

• How do they compare?

• Do they have conflicts of interest?

• Are they insured?

• What is their organizational structure/support?

• Review their Form ADV

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S T E P 1 0 : I M P L E M E N T F I D U C I A R Y T R A I N I N G

• Consider an ERISA training program:

• Include fiduciaries and support staff

• Essential for new fiduciaries

• Who is best suited to provide the training?

• Consider a refresher course

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #10 - Irregular and/or Poorly Documented 401(k) Committee Meetings

• Regular meetings of Plan fiduciaries to discuss and act on Plan matters is ‘good

business’

• Documentation of Plan Sponsor approval to

• Set the annual match

• Make changes to investment funds

• Amend the Plan

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #9 - Reliance on Manual Processes without sufficient controls

• Deferral rates into payroll systems

• Participant Loans

• Employer Match True-up

• Final Participant Paycheck

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #8 - Inaccurate Census Data prepared for Compliance Testing and

Employer Match True-up

• Is the data complete?

• Do eligible wages agree with the Plan’s definition of compensation?

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #7 - Insufficient Employee Training

• Your staff needs to understand the terms of the Plan and DOL regulatory

requirements.

• Will your employees recognize an operational error if it occurs? Will they know

how to fix it or who to ask?

• Do you have employees that can adequately review and approve the Form 5500

filing and your financial statements?

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #6 - Failure to Correct Audit Findings and Other Operational Errors on

a Timely Basis

• These things don’t go away- even with a new auditor!

• Document all corrections.

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #5 - Late and Inconsistent Remittances of Participant Contributions

and Loan Repayments

• Participant contributions become plan assets at the earliest time they can be

reasonably segregated from the general funds of the employer, but no later than

the 15th business day of the month following the withholding or receipt by the

employer.

• Safe Harbor for Plans under 100 participants is 7 business days after pay date.

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #4 - Insufficient Planning for Changes to the Plan and Service

Providers

• Recordkeeper conversions

• Late contributions

• Fund Mapping errors

• New provider does not know the Plan

• Lost data – auto enrollment, auto escalate, vesting, deferral histories

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #4 - Insufficient Planning for Changes to the Plan and Service

Providers

• Plan amendments/restatements/mergers

• Vesting schedules

• Match rates and formulas

• Eligible earnings

• Required communications – MM and SPD

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #4 - Insufficient Planning for Changes to the Plan and Service

Providers

• Corporate Acquisitions

• Expect compliance issues with acquired Plans!

• Payroll Provider Changes

• Payroll schedule changes: Consider the impact on loans and fixed participant contributions.

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #3 – No Routine Oversight of the Plan’s Recordkeeper

• Participants will not catch mistakes!!

• Establish a routine to periodically

• Recalculate forfeitures

• Track auto enrollments and auto increases

• Agree deferral rates periodically for all employees

• Recalculate matching contributions

• Maintain a Contribution Schedule and track when contributions are posted to the

Plan.

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #2 - Failure to Follow the Plan Document

• The Plan documents should be accessible – the SPD is not sufficient!

• Documents may include – insurance contracts, proto-type/ volume submitters

plan, adoption agreement, lots of amendments

• Read the definitions!

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #2 - Failure to Follow the Plan Document

• Do you know how your Plan defines compensation?

• How are matching contributions Calculated?

• How are forfeitures calculated?

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T O P T E N 4 0 1 ( K ) P I T FA L L S

• #1 - Failure to Employ an Audit Firm with Specialized 401(k) Expertise

• Your audit firm should

• Have a dedicated team of experienced 401(k) auditors

• Have a meaningful 401(k) audit practice – not a sideline

• Participate in the AICPA Employee Benefit Plan Audit Quality Center

• Provide educational opportunities for clients and value added services

• Meet your deadlines for a timely Form 5500 filing

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S U R V I V I N G A D O L A U D I T

• Enforcement

• Federal stimulus package included millions for increased enforcement

• DOL Wage and Hour Division hired 300 new investigators through 2011

• 400 investigations in 2009; 1,400 in 2010

• Sweeps and targeting of subcontractors

• H & W goal of debarring at least 90 companies in 2011 compared to 10 to 20 in

past years

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S U R V I V I N G A D O L A U D I T

• The DOL Examination Process

• Why would the DOL investigate you?

• What can you expect?

• How can you be prepared?

• A DOL examination may be referred to as an audit or an investigation

• Your Investigator or auditor may have a different expertise: JD, CPA or

MBA

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I N V E S T I G AT I O N T R I G G E R S

• Participant Complaint

• Annual Report Form 5500 Red Flags

• Administrative expenses, employer securities, personal property, partnership/joint

venture interests, real property, real estate, loans

• and Compliance Questions

• Contributions, loans, leases, transactions, bonds, assets

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I N V E S T I G AT I O N T R I G G E R S

• Service Provider Referral

• ERISA Co-Fiduciary Liability

• Knowing participation or concealment

• Enabling a breach to occur

• No reasonable steps to remedy situation

• DOL Targeting Initiatives

• Multiple employer welfare arrangement, health disclosures, claims issues, settlor

fees, employee contributions, recidivism, abandoned plans, apprenticeship plans

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I N V E S T I G AT I O NS TA G E 1 : A P P O I N T M E N T L E T T E R

• 3 – year audit period (max 6)

• Photo copies only

• Request receipt

• Tab to appointment letter

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40

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I N V E S T I G AT I O NS TA G E 2 : O N S I T E I N V E S T I G AT I O N

• You should…

• Ask why

• Ask if it’s a criminal investigation

• Cease voluntary cooperation

• Immediately seek counsel

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I N V E S T I G AT I O NS TA G E 2 : O N S I T E I N V E S T I G AT I O N

• Areas of scrutiny

• Corporate Governance/Plan Administration

• Disclosure

• Reporting

• Bonding

• Funding

• Investment Selection/Monitoring/Fees

• Service Providers Selection/Monitoring/Fees

• Participant Loans

• Contribution Testing

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I N V E S T I G AT I O NS TA G E 3 : C O M P L I A N C E

• Voluntary Compliance Letter (VCL)

• Response

• Negotiation

• Action

• Closing

44

P O T E N T I A L P E N A LT I E S

• Civil penalty for fiduciary breach – 20% of the amount recovered

• The DOL may waive the penalty for financial hardship or acting in good

faith

• Only issue penalties for:

• Civil litigation

• Formal settlements

• Repeat offenders

• Egregious situations

45

P O T E N T I A L P E N A LT I E S

• Role of IRS

• DOL will refer to the IRS

• IRS will assess an excise tax

46

L E A R N F R O M E X P E R I E N C E

• Examine your administrative practices

• Incorporate the DOL’s findings

• Don’t repeat mistakes

• Document your decisions, actions and considerations

• Improve record keeping and retention

• Learn to investigate yourself

47

S E R V I C E P R O V I D E R F E E D I S C L O S U R E

• Your service providers must now disclose all of the compensation they

receive (408(b)(2))

• Description of services to be provided

• All direct compensation

• All indirect compensation

• Compensation attributable to recordkeeping services

• Each investment option’s annual operating expense and other ongoing expenses

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S E R V I C E P R O V I D E R F E E D I S C L O S U R E

• You must review these disclosures and determine:

• Fees are reasonable

• No conflict of interest

49

S E R V I C E P R O V I D E R F E E D I S C L O S U R E

• Which Plans?

• All ERISA-covered plans except: SEP, SIMPLE, IRA, Frozen 403(b), Keogh and

HR-10

• Which Service Providers?

• Record keeper, Custodian, TPA, Investment Advisor, Broker

• Anyone else?

• Accountant, Actuary, Appraiser, Legal

• The Trigger?

• If the plan pays someone $1,000 or more, you should get a disclosure

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5 A C T I O N S T E P SS T E P 1 : M A K E A L I S T

• Service Provider Name and Point of Contact

• Type of Service Provided

• Did they comply with the disclosure requirements

• Date received

• Are they a fiduciary?

• Indirect Comp?

• Direct Comp?

• Investment Disclosures?

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5 A C T I O N S T E P SS T E P 2 : G E T I N F O R M AT I O N

• All service providers must provide:

• Description of the services provided (contract)

• Status (affiliate, subcontractor, fiduciary)

• Description of direct compensation

• Detailed description of indirect compensation (services, payer and method)

• Termination fee or prepaid refunds

• Manner of Receipt

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• All service providers must provide:• Description of the services provided

(contract)• Status (affiliate, subcontractor, fiduciary)• Description of direct compensation• Detailed description of indirect

compensation (services, payer and method)• Termination fee or prepaid refunds• Manner of Receipt

All service providers must provide: For each investment in the plan:

5 A C T I O N S T E P SS T E P 1 : M A K E A L I S T

• If a provider doesn’t give you something, you must:

• Make a written request for more information; then

• You then have 30 days to notify the DOL after either:

• The provider actually refuses; or

• 90 days have passed and no response is received

• If any information changes, your provider should tell you annually

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5 A C T I O N S T E P SS T E P 4 : E VA L U AT E A N D B E N C H M A R K

• Make use of a third party benchmark for fees and services:

• Qualifications compared to other service providers;

• Quality of services compared to other service providers; and

• Cost in light of services compared to other service providers

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5 A C T I O N S T E P SS T E P 4 : E VA L U AT E A N D B E N C H M A R K

• How do you benchmark?

• Should you solicit bids?

• What is a third party benchmark?

• What if your fees are high?

• If you fees are not reasonable?

• Renegotiate fees or ask for more

services

• Use an ERISA fee recapture account

• Terminate services as a last resort

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5 A C T I O N S T E P SS T E P 5 : B U I L D Y O U R F I L E

• Document the entire process in your service provider file:

• Evaluation of each service provider’s performance

• Your selection of a service provider

• Your reasoning for not selecting a service provider

• Service provider performance in a manner and fee consistent with the

agreements

• Participant service provider complaints

• Any change in the information you received from the service provider

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W H AT H A P P E N S I F Y O U D O N ’ T C O M P LY ?

You have a duty to terminate the relationship. If you don’t:• It is a prohibited transaction• You would be liable to the plan participants to

restore any losses or any smaller gains than expected

• You may be exposed to litigation alleging that plan expenses are unreasonable

• You could be personally liable for the losses • There is a 15% prohibited transaction excise

tax assessed

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Need help?• Start with your advisor• Contact your relationship managers• Use a checklist• Possibly ERISA Counsel• The DOL (FAQs, Benefits Advisors)

PA R T I C I PA N T F E E D I S C L O S U R E

• What does it mean?

• Participants need to make informed decisions about their accounts

• Participants should be able to compare investment options

• Requires you to disclose:

• Plan

• Fee

• Investment information

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PA R T I C I PA N T F E E D I S C L O S U R E

• Does it apply to your plan?

• Most participant-directed individual account palns

• 401(k) plans

• 403(b) plans

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PA R T I C I PA N T F E E D I S C L O S U R E

• Annual Disclosure Plan-Related Information

• Explanation of how participants may give investment allocation instructions

• Information regarding plan’s investment menu

• Explanation of general administrative fees and individualized services, such as

loans and divorce orders

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W H AT Y O U M U S T D O T O C O M P LY

• Annually• Plan, investment and fee

information to all participants who are eligible to direct investments in the plan

• If you provide participant statements less than quarterly, you may rely on continuous access of a webpage by communicating annually that they can access the information via their personal login

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• Quarterly• Dollar amount of plan level and

participant fees taken from participants’ account balances

• To all participants who have an account balance in your plan

• Most common method of delivery will be to include this information with participant’s quarterly account statements

A N N U A L N O T I C E C H A N G E S

• If you change the plan, investment options or fee information in your Annual Disclosure:• You must notify your eligible participants of that change 30 – 90 days in advance

of the change taking effect

• Examples• Investment options added or removed• Changed to the administrative expenses• Changes to the collection method• Changes to transaction fees• Adding/removing a participant-level service that has a fee

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W H AT H A P P E N S I F Y O U D O N ’ T C O M P LY ?

• It’s a fiduciary breach• The DOL does not impose any penalties for a failure to comply with the

new regulations• The real consequence of the failure would be its use as evidence of

imprudence in a legal action maintained by the DOL or the participant

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Q U E S T I O N S / C O M M E N T S

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R E S O U R C E S

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Sandy Wendler, ManagerSandy.wendler@cohnreznick.com(703) 847-4444

Travis Dutton, Lockton Retirement Servicestdutton@lockton.com(443) 462-1085

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