Employee benefit plan large filers: Meeting your compliance and fiduciary requirements. April 20, 2016

Transcription

1 Employee benefit plan large filers: Meeting your compliance and fiduciary requirements April 20,

2 Your presenters Rose Ann Abraham, CPA Partner Baker Tilly > Leads Baker Tilly s employee benefit plan audit practice in Chicago > Active member of the Illinois CPA Society s employee benefit plan committee and conference task force 4

3 Your presenters Charles Williams Managing Director Sheridan Road x255 > Focuses on Sheridan Road s retirement plan consulting business > Adjunct Professor at the School of Continuing Studies at Northwestern University, teaching a retirement planning and employee benefits course to students studying to become Certified Financial Planners. 5

4 Agenda 1) Fiduciary responsibility 2) Audit readiness & best practices 3) Regulatory initiatives and updates 6

5 Retirement Plan Fiduciary Landscape 8 The Best Route to Financial Success 8

6 Retirement Plan Fiduciary Landscape Industry Trends Rapidly Changing Regulatory Environment Increased Costs of Employee Benefits Consolidation of Retirement Plan Providers Employees Increasingly looking to Employers for Financial Guidance Companies Required to Take More Active Role in Managing Fiduciary Obligations The Best Route to Financial Success 9

7 Retirement Plan Fiduciary Landscape ERISA The Employee Retirement Income Security Act (ERISA) is a federal law that: Protects the interests of retirement plan or employee benefit plan participants and beneficiaries Contains civil enforcement provisions and penalties for noncompliance Is administered and enforced by the Employee Benefit Security Administration (EBSA) Fiduciaries can be personally liable for plan losses Fiduciaries may be responsible for co-fiduciary breaches Section 405(a) of ERISA provides that a fiduciary of a plan may be liable for a breach of fiduciary responsibility committed by another fiduciary of the plan: (1) if he knowingly participates in, or knowingly undertakes to conceal a breach (2) enables another fiduciary to commit a breach (3) if he has knowledge of the breach and fails to make reasonable efforts under the circumstances to remedy the breach. The Best Route to Financial Success 10

8 Retirement Plan Fiduciary Landscape EBSA Investigations EBSA s 2014 Highlights Closed 3,928 civil investigations with 2,541 (65%) resulting in corrective actions and/or monetary recoveries totaling $600 million Closed 365 criminal investigations leading to indictment of 106 individuals for offenses related to employee benefit plans Handled 213,664 inquiries and recovered $356 million in benefits on behalf of workers and their families through informal resolution of individual complaints How EBSA Investigation Subjects are Identified Form 5500s Referrals from other governmental agencies Public information media, court or other governmental filings Complaints Private lawsuits The Best Route to Financial Success 11

9 Fiduciary Roles and Responsibilities 12 The Best Route to Financial Success 12

10 Plan Fiduciary Roles and Responsibilities 2 Types of Fiduciary Responsibilities A NAMED Investment FUNCTIONAL Administrative ACCIDENTAL In the plan documen t Exercises control Acts like a fiduciary The Best Route to Financial Success 13

11 Fiduciary Roles and Responsibilities 1 The Exclusive Benefit Rule 2 The Prudent Person Rule 3 Diversification Rule* 4 Duty to Follow Plan Terms *ESOP exception to the diversification rule The Best Route to Financial Success 14

12 Fiduciary Roles and Responsibilities How does someone become a fiduciary? A B C NAMED In the plan document FUNCTIONAL Exercises control ACCIDENTAL Acts like a fiduciary The Best Route to Financial Success 15

13 Fiduciary Roles and Responsibilities Internal Plan Fiduciaries Employer Sponsors the retirement plan - Plan Sponsor Trustee(s) Plan Administrator Retirement Plan Committee Responsible for managing plan assets. Responsible for the day-to-day administration including Ensure all filings with the federal government (such as Form 5500) are timely submitted Make important disclosures to plan participants Hire service providers if no other fiduciary has that responsibility Fulfill fiduciary responsibilities as set forth in plan documents Maintain/oversee day-to-day plan operations Responsibilities vary from organization to organization. Common responsibilities include: Prepare and maintain Investment Policy Statement (IPS) Provide sufficient asset classes with different and distinct risk/return profiles Select investment options prudently Control and account for all plan expenses Monitor and supervise all service vendors Avoid prohibited transactions and conflicts of interest The Best Route to Financial Success 16

14 Fiduciary Roles and Responsibilities External Plan Fiduciaries Investment Adviser (ERISA 3(21)) Investment adviser who serves as a co-fiduciary investment adviser under ERISA 3(21). The Plan sponsor shares fiduciary responsibility for plan investment decisions with the Investment adviser. Investment Manager (3(38)) Investment Manager takes full discretionary responsibility for selecting and monitoring plan investments Administrative Fiduciary (3(16)) Independent firm that assumes full responsibility for fulfilling plan administrative fiduciary obligations The Best Route to Financial Success 17

15 Fiduciary Roles and Responsibilities ERISA Fidelity Bonds Protect plan against losses that result from fraudulent or dishonest acts of those covered by the bond Mandatory ERISA requirement Bond must be equal to 10% of the plan holdings with a maximum of $500,000 Minimum bond requirement of $1,000 and maximum bond requirement of $500,000 ($1 million for a plan that holds employer stock) Not intended to insure or indemnify (cover) a fiduciary for any claims of dishonesty made against him/her personally. Fiduciary Liability Insurance Can offer coverage for internal plan fiduciaries for breach of fiduciary duty under ERISA Fiduciaries may purchase insurance to cover their own liability or an employer or union may purchase liability insurance for plan fiduciaries Fiduciary Liability Insurance does not include fidelity bonds Indemnification Agreements An Indemnification agreement can potentially serve as an alternative or in addition to purchasing liability insurance Typically the Plan sponsor/employer would agree to pay any losses suffered by the fiduciary The Best Route to Financial Success 19

16 Fiduciary Roles and Responsibilities ERISA Section 404(c) Protection Provides a set of voluntary guidelines to transfer the potential liability associated with investment decision making responsibilities to employees who participate in a 401(k) plan Plan sponsors choosing to comply with ERISA Section 404(c) must meet these key requirements: Provide participants the opportunity to choose from a broad range of investment options Provide opportunity for participants to exercise control over their accounts Opportunity for participants to transfer among their investment options at least quarterly Additionally, sponsors must provide sufficient information to help participants make educated decisions about their investment options The Best Route to Financial Success 20

17 Fiduciary Roles and Responsibilities Qualified Default Investment Alternatives ( QDIAs ) Extended fiduciary protection with a QDIA PPA extends ERISA Section 404(c) protection to offer safe harbor relief to Plan sponsors from liability for their plan s default investment. A plan fiduciary following these regulations will not be liable for their decision to invest participant amounts in the QDIA (including any investment losses that result) However, plan fiduciaries still remain responsible for prudently selecting and monitoring the QDIA for their plan Investment vehicles that may qualify as a QDIA under the DOL rules: Life-cycle or target date funds Professionally managed accounts Balanced funds The Best Route to Financial Success 21

18 Fiduciary Roles and Responsibilities Fee Management ERISA states that plan sponsors must determine if payments for plan expenses are consistent with ERISA requirements. Included in the ERISA requirements are the following: Plan assets may only be used for the exclusive benefit of participants and beneficiaries, and provide that plan fiduciaries must ensure that plan assets only be used to defray reasonable plan administrative expenses. Expenses can be broken down into two categories: Administrative Plan Expenses These are reasonable expenses which include direct expenses incurred in the performance of fiduciary duties to administer the plan. These can be paid by plan assets. Settlor Expenses These are often expenses related to the formation of the plan versus the management of the plan. These cannot be paid by plan assets. The Best Route to Financial Success 22

19 Best Practices for Effective 401(k) Plan Management 23 The Best Route to Financial Success 23

20 Best Practices for Effective 401(k) Plan Management Plan Oversight Create a Retirement Plan Committee Meet regularly and document plan decisions Provide fiduciary training for Committee and other relevant employees who are involved with the Retirement Plan Utilize prudent experts Monitor and periodically evaluate all service providers Avoid prohibited transactions The Best Route to Financial Success 24

21 Best Practices for Effective 401(k) Plan Management Plan Design Understand all plan provisions Align plan design to goals of the company and needs of the employees Benchmark plan design against industry peers SAMPLE 401(k) Plan Peer Comparison Plan Design 401(k) Plan 100% of peer group offer a 401(k) Plan Eligibility 18 years of age and 1,000 hours if not regularly scheduled to work 20 50% of peer group has immediate eligibility. hours per week. (otherwise immediate) 36% of peer group has eligibility between 1-3 months Auto Features automatic enrollment at 6% with 1% auto escalation up to 10% 64% of peers use automatic enrollment. 50% of peers auto enroll at 3%; 21% auto enroll at 6% 36% of peers have auto escalation Match Formula Yes, 50% on the first 6% deferred If pay is less than $33,400, match is equal to 50% up to maximum annual match of $1,000 93% of peers make matching contributions 62% of peers match 50% on the first 6% deferred (most common formula) Match Vesting Less than 1 0% 38% of peers have immediate vesting More than 1, less than 2 33% 14% of peers vest 100% after 3 years Schedule More than 2, less than 3 67% 29% of peers have vesting schedules of at least 5 years More than 3 years 100% Roth Option Yes 75% of peers offer Roth option * Peer data taken from 2015 Industry Report for Insurance/Reinsurance Companies. Average 401k plan size of peer group is $50 million - $200 million. A full report is included in the Appendix. The Best Route to Financial Success 25

22 Best Practices for Effective 401(k) Plan Management Compliance Review annual Form 5500s and pay special attention to the following: Was there was a failure to transmit any participant contributions within the time period described in 29CFR ? Has the Plan has maintained an adequate fidelity bond? Did the Plan did not fail to provide any benefit when due under the Plan? Provide participant notices on a timely basis Respond to inquiries Review and understand annual plan testing: (k) ADP Pass Pass Fail* Pass 401(m) ACP Pass Pass Pass Pass 402(g) Elective Deferral Pass Pass Pass Pass 415(c) Annual Additions Pass Pass Pass Pass 401(b) Minimum Coverage Pass Pass Pass Pass Top Heavy No No No No The Best Route to Financial Success 26

23 Best Practices for Effective 401(k) Plan Management Fee Management Quantify all plan expenses. There are two primary expenses associated with the 401(k) Plan: Investment Expenses Administrative Expenses Benchmark Plan Expenses Review options for paying plan expenses Company vs participant paid Pay through revenue sharing and/or billable expenses Consider fee equalization strategy to separate investment and administrative expenses The Best Route to Financial Success 27

24 Best Practices for Effective 401(k) Plan Management Investment Management Create and maintain and effective Investment Policy Statement (IPS) Select investment options prudently and for the exclusive benefit of the employees Monitor investments and make changes when appropriate Communicate plan changes to participants The Best Route to Financial Success 29

25 Best Practices for Effective 401(k) Plan Management Employee Education Ensure required notices are distributed Survey employees Provide multiple modes of education Provide multiple education topics and incorporate into company s wellness campaigns Document education process The Best Route to Financial Success 30

26 Fiduciary responsibility Department of Labor is responsible for ensuring plan fiduciaries are held accountable Basic fiduciary responsibilities > Act solely in the interest of plan participants and their beneficiaries > Carry out activities of the plan prudently > Operate the plan in accordance the plan document (and laws and regulations under ERISA) > Diversify plan investments > Pay reasonable plan expenses > Ensure plan fiduciaries are bonded by a fidelity bond Select and monitor third party service providers > Hiring a service provider in and of itself is a fiduciary function. 31

27 The DOL s accomplishments for FY

28 The DOL s accomplishments for FY 2015 (contd.) 33

29 Audit readiness & best practices >When is an audit required? >What type of an audit limited vs. full scope? >What documents are the auditors interested in? >Best practices to be ready for an audit 34

30 When is an audit required? All plans under ERISA require a form 5500 filing > Small filer generally less than 100 participants file Form 5500 SF and include Schedule I to present financial information > Large filer generally greater than 100 (see rule) file Form 5500 and Schedule H to present financial information When filing Schedule H with 5500 > Over 100 Participants at BOY > Rule > Other exemptions > Must attach an IQPA report Health & Welfare Plans > Claims paid entirely out of employer general assets, entirely from insurance, or a combination of the two 36

31 Fiduciary responsibility audit scope Full scope > Required for 11-K filers > Investment Testing Limited scope > ERISA section 103(a)(3)(c) allows the plan administrator to instruct the auditor not to perform any auditing procedures with respect to investment information > The election is available, however, only if the trustee or custodian certifies both the accuracy and completeness of the information submitted. > Investment transactions not audited > Must get certified statements 37

32 Audit readiness & best practices Hire competent professionals > Understand the filing deadlines for your plan > Gather and review documents and store in one spot > Discuss audit requirement with internal and external parties > Designate point of contact to take on responsibility for the audit > Understand your plan investments and be sure to obtain supporting documentation for any hard to value assets 38

33 Audit readiness & best practices Submit all documents based on your agreed upon timeline Look out for common compliance issues > Review contribution timeliness > Eligible compensation issues Pay close attention to open requests for documents or questions Financial statement review and approval Filing your 5500 on time 39

34 Regulatory update Department of Labor (DOL) initiatives >DOL Audit Quality Study >5500 analytics >DOL cybersecurity 40

35 DOL updates 2014 Audit Quality Study (AQS) >Performed by the Office of the Chief Accountant (OCA), the EBSA and the US Department of Labor (DOL) >The 39% deficiency rate and downward trend in quality Audit Quality Study Audit with GAAS deficiencies 23% 19% 33% 39% 41

36 DOL Updates 2014 Audit Quality Study (AQS) EBSA obtained their sample from: > Approximately 81,000 Form 5500 filers > For the year ended December 31, 2011 > Sample totaled 400 plans > Audits performed by 7,330 different CPA firms > The 400 plan audits in the sample were divided into six strata based on the of number of plan audits performed by each CPA firm. 42

37 DOL Updates 2014 Audit Quality Study (AQS) Who audits employee benefit plans? 2011 DOL Form 5500 database CPA firms performing plan audits # of plans audited # of CPA firms # of audits performed 1-2 3,684 4, ,519 5, ,603 17, , , ,423 TOTAL 7,330 81,162 43

38 DOL updates AQS key findings 44

39 DOL updates 2014 Audit Quality Study (AQS) Key findings summary 1. 61% rate of full compliance with professional standards or only minor deficiencies % plan audits had major deficiencies with respect to GAAS - would lead to rejection of the Form 5500 filing (nearly 4 out of 10). 3. Less number of audits performed = higher deficiency rate > CPA firms with the lowest number of plan audits annually had a 76% deficiency rate based on the stated criteria of the determination of a deficient audit (major). 4. More number of audits performed = lower deficiency rate > CPA firms with the highest number of plan audits = 12% deficiency rate 45

40 DOL Updates 2014 Audit Quality Study (AQS) Key findings summary (cont.) 5. Peer review and practice monitoring efforts have not resulted in improved audit quality. > In 4 of the 6 strata, acceptable peer reviews were received by CPA firms that had deficiencies. 6. Members of the AICPA Employee Benefit Plan Audit Quality Center had a tendency to have fewer deficiencies. 7. As the level of EBP specific training increased, the percentage of deficient audits decreased. 8. Of the 400 audit reports reviewed, 67 or 17% failed to comply with one or more of the Employee Retirement Income Security Act of 1974 s (ERISA) reporting requirements. 46

41 Recommendations from EBSA - enforcement Focus on: > CPA firms with smaller employee benefit plan audit practices that include plans with larger plan assets > CPA firms in the strata (high deficiency rates) > Work with AICPA Peer Review staff to streamline process, enforce peer review requirement and identify CPA s who have not received acceptable peer review Work with National Association of State Boards of Accountancy (NASBA) and the AICPA to improve investigation and sanctioning process for CPA firms who perform deficient audit work 47

42 Recommendations from EBSA - enforcement Amend ERISA to make sure annual reporting civil penalties focus on the responsible party: > Authorize the Secretary of Labor to assess all or part of the current annual reporting civil penalty up to $1,100 per day against the accountant engaged to do an ERISA plan audit if the plan's annual report is rejected due to a deficient audit or due to a failure to meet standards for qualification to perform an ERISA audit 48

43 Recommendations from EBSA regulatory/legislative Amend the ERISA definition of qualified public accountant > Include additional requirements and qualifications to ensure quality of plan audits Secretary of Labor would be authorized to issue regulations concerning qualification requirements Amend ERISA to repeal the limited-scope audit exemption 49

44 Recommendations from EBSA regulatory/legislative Amend ERISA to give authority to the Secretary of Labor to: > Establish accounting principles and audit standards > Protect the integrity of the employee benefit plans and the benefit security of participants by establishing these standards 50

45 Regulatory initiatives DOL analytical review of the Form 5500 The DOL continues to increase its analytical review of Form 5500 > Incomplete forms or check boxes triggering audits > Plans where the prior year end of year balance not agreeing to the current year beginning balance > Non-filers of plans with over 100 participants DOL reviewing files of plans with over 100 participants, who have not filed a Form

46 Regulatory updates - Cybersecurity DOL asking if plan governance includes cybersecurity Parties involved in plan administration including custodians, record-keepers, payroll service provider as well as the plan sponsors are vulnerable to cyber attacks 52

47 Regulatory updates - Cybersecurity The DOL is asking how plan governance teams evaluate cybersecurity as part of their overall plan governance Some consideration should be given around: > Policies and procedures > Diagnosis of threats > Backup and recovery plans > Responsibility for losses or breach > Training policies to reinforce data security 53

48 Disclosure The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International Baker Tilly Virchow Krause, LLP 55