DOL Survival Guide and Top Ten 401(k) Pitfalls

Transcription

1 DOL Survival Guide and Top Ten 401(k) Pitfalls Presented by CohnReznick s Government Contracting Industry Practice Sandy Wendler, Manager and Travis Dutton, Principal, Lockton Retirement Services

2 PLEASE READ 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. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. This presentation and its content are the property of CohnReznick LLP and are protected by applicable copyright laws. Any unauthorized use of the information herein will be considered a violation of CohnReznick LLP s intellectual property rights. Unless stated otherwise herein, no part of this presentation may be copied, distributed, or published, in whole or in part, without the prior written agreement of CohnReznick LLP. 1

3 AGENDA 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 2

4 STEP 1: UNDERSTAND YOUR ERISA FIDUCIARY DUTIES 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) 3

5 STEP 1: UNDERSTAND YOUR ERISA FIDUCIARY DUTIES Diversification minimize the risk of large losses Follow the terms of the plan 4

6 STEP 2: ARE YOU AN ERISA FIDUCIARY 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 5

7 STEP 3: CREATE AN INVESTMENT FIDUCIARY FILE 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) 6

8 STEP 3: CREATE AN INVESTMENT FIDUCIARY FILE 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 7

9 STEP 4: REVIEW YOUR FIDUCIARY FILE 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? 8

10 STEP 4: REVIEW YOUR FIDUCIARY FILE 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? 9

11 STEP 5: STEPS TO MITIGATE YOUR RISK 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 10

12 STEP 5: STEPS TO MITIGATE YOUR RISK Shift the risk where you can Educate your fiduciaries Consider purchasing insurance Make use of a Qualified Default Investment Alternative (QDIA) 11

13 STEP 6: FOLLOW YOUR INVESTMENT POLICY STATEMENT 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 12

14 STEP 6: FOLLOW YOUR INVESTMENT POLICY STATEMENT 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 13

15 STEP 7: BUILD AN EFFECTIVE INVESTMENT COMMITTEE Consider a Charter: Establishes a purpose Defines roles Delegates responsibility Sets membership Organizes meetings Notice of duty 14

16 STEP 7: BUILD AN EFFECTIVE INVESTMENT COMMITTEE 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) 15

17 STEP 7: BUILD AN EFFECTIVE INVESTMENT COMMITTEE Educate new members on the plan and ERISA acknowledge participation 16

18 STEP 8: RUN AN EFFECTIVE INVESTMENT COMMITTEE 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 17

19 STEP 8: RUN AN EFFECTIVE INVESTMENT COMMITTEE Retain materials and reports in the Fiduciary File How will communications flow to the Plan Sponsor or Plan Administrative Committee? 18

20 STEP 9: SELECT AND MONITOR YOUR ADVISORS 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 19

21 STEP 9: SELECT AND MONITOR YOUR ADVISORS 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 20

22 STEP 10: IMPLEMENT FIDUCIARY TRAINING 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 21

23 TOP TEN 401(K) PITFALLS #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 22

24 TOP TEN 401(K) PITFALLS #9 - Reliance on Manual Processes without sufficient controls Deferral rates into payroll systems Participant Loans Employer Match True-up Final Participant Paycheck 23

25 TOP TEN 401(K) PITFALLS #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? 24

26 TOP TEN 401(K) PITFALLS #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? 25

27 TOP TEN 401(K) PITFALLS #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. 26

28 TOP TEN 401(K) PITFALLS #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. 27

29 TOP TEN 401(K) PITFALLS #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 28

30 TOP TEN 401(K) PITFALLS #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 29

31 TOP TEN 401(K) PITFALLS #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. 30

32 TOP TEN 401(K) PITFALLS #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. 31

33 TOP TEN 401(K) PITFALLS #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! 32

34 TOP TEN 401(K) PITFALLS #2 - Failure to Follow the Plan Document Do you know how your Plan defines compensation? How are matching contributions Calculated? How are forfeitures calculated? 33

35 TOP TEN 401(K) PITFALLS #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 34

36 SURVIVING A DOL AUDIT Enforcement Federal stimulus package included millions for increased enforcement DOL Wage and Hour Division hired 300 new investigators through 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 35

37 SURVIVING A DOL AUDIT 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 36

38 INVESTIGATION TRIGGERS 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 37

39 INVESTIGATION TRIGGERS 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 38

40 INVESTIGATION STAGE 1: APPOINTMENT LETTER 3 year audit period (max 6) Photo copies only Request receipt Tab to appointment letter 39

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43 INVESTIGATION STAGE 2: ONSITE INVESTIGATION You should Ask why Ask if it s a criminal investigation Cease voluntary cooperation Immediately seek counsel 42

44 INVESTIGATION STAGE 2: ONSITE INVESTIGATION Areas of scrutiny Corporate Governance/Plan Administration Disclosure Reporting Bonding Funding Investment Selection/Monitoring/Fees Service Providers Selection/Monitoring/Fees Participant Loans Contribution Testing 43

45 INVESTIGATION STAGE 3: COMPLIANCE Voluntary Compliance Letter (VCL) Response Negotiation Action Closing 44

46 POTENTIAL PENALTIES 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

47 POTENTIAL PENALTIES Role of IRS DOL will refer to the IRS IRS will assess an excise tax 46

48 LEARN FROM EXPERIENCE 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

49 SERVICE PROVIDER FEE DISCLOSURE 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 48

50 SERVICE PROVIDER FEE DISCLOSURE You must review these disclosures and determine: Fees are reasonable No conflict of interest 49

51 SERVICE PROVIDER FEE DISCLOSURE 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 50

52 5 ACTION STEPS STEP 1: MAKE A LIST 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? 51

53 5 ACTION STEPS STEP 2: GET INFORMATION All service providers must provide: 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 For each investment in the plan: 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 52

54 5 ACTION STEPS STEP 1: MAKE A LIST 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 53

55 5 ACTION STEPS STEP 4: EVALUATE AND BENCHMARK 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 54

56 5 ACTION STEPS STEP 4: EVALUATE AND BENCHMARK 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 55

57 5 ACTION STEPS STEP 5: BUILD YOUR FILE 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 56

58 WHAT HAPPENS IF YOU DON T COMPLY? 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 Need help? Start with your advisor Contact your relationship managers Use a checklist Possibly ERISA Counsel The DOL (FAQs, Benefits Advisors) 57

59 PARTICIPANT FEE DISCLOSURE 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 58

60 PARTICIPANT FEE DISCLOSURE Does it apply to your plan? Most participant-directed individual account palns 401(k) plans 403(b) plans 59

61 PARTICIPANT FEE DISCLOSURE 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 60

62 WHAT YOU MUST DO TO COMPLY 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 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 61

63 ANNUAL NOTICE CHANGES If you change the plan, investment options or fee information in your Annual Disclosure: You must notify your eligible participants of that change 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 62

64 WHAT HAPPENS IF YOU DON T COMPLY? 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 63

65 QUESTIONS/COMMENTS 64

66 RESOURCES Sandy Wendler, Manager (703) Travis Dutton, Lockton Retirement Services (443) GovCon360 keeps you abreast of the ever-changing regulatory environment that is Government contracting. From reference materials, like searchable pdf copies of the FAR and DCAM, to our past Lunch and Learn seminar slide decks and thought pieces on industry matters, we ve got it covered. Subscribe to our RSS feed to receive short alerts on recent industry changes. It s always been our job to help our clients maintain a competitive advantage by staying ahead of the curve. This website is an extension of the services we ve been providing for over 35 years by putting useful resources and up-to-date information at your fingertips. 65