Effectively Navigating DOL Investigations of Plans and Service Providers

Effectively Navigating DOL Investigations of Plans and Service Providers Jean Ackerman Department of Labor Heather B. Abrigo, Esq. Drinker Biddle & Reath LLP Heather B. Abrigo, Esq. Drinker Biddle & Reath LLP Heather B. Abrigo has extensive experience in all aspects of employee benefits and especially with working alongside plan committees to fulfill their fiduciary duties. Her clients come to her for assistance with qualified retirement plans as well as health and welfare issues. Heather works with public sector employers and navigating their retirement plan issues as well as their retiree health plans. She also assists her clients in connection with Department of Labor investigations and Internal Revenue Service audits. Her services include but are not limited to assisting plan sponsors meet their fiduciary responsibilities, reporting and disclosure matters, and drafting qualified, non-qualified and welfare benefit plan documents. 1

Heather B. Abrigo, Esq. Drinker Biddle & Reath LLP Heather has assists various service providers in the financial services sector with their service agreements and complying with disclosure requirements under ERISA and the SEC. Heather coauthored the 14th Edition of "Tools & Techniques of Employee Benefits and Retirement Planning" published by the National Underwriter Company. She is also a regular contributor to the 401(k) Advisor publication. Heather has been a regular contributor to the California HR newsletter and a frequent speaker at California HR audiocasts and webinars. She is also a contributor to the firm's LaborSphere blog, which provides coverage and insights on breaking cases, recently enacted legislation and a broad range of employee benefits and labor issues. Effectively Navigating DOL Investigations of Plans and Service Providers 2017 NIPA Annual Forum & Expo Heather B. Abrigo, Esq. Drinker Biddle & Reath Jean Ackerman, Regional Director DOL Employee Benefits Security Administration 2

DOL Disclaimer Ms. Ackerman s views are personal and may not represent Department of Labor policy. Introduction Today s Topics Employee Benefits Security Administration (EBSA): Charged with investigating ERISA violations and it has subpoena power! National Enforcement Projects - Trends Regional Enforcement Projects - Trends The Investigative Process How Best to Prepare For and Participate in a DOL Investigation. 3

EBSA National Office Various divisions with varying missions Regional Offices Regional Directors Benefits Advisors handle customer service calls Investigators typically attorneys or accountants Supervisors typically former investigators EBSA Regional Offices Kansas City Chicago Cincinnati Boston New York Philadelphia San Francisco Regional Offices Los Angeles Dallas Atlanta 4

EBSA: Civil and Criminal Investigations EBSA has broad investigative authority Most EBSA investigations are civil, but EBSA also has authority to conduct criminal investigations Criminal cases go to the U.S. Attorney s Office instead of DOL Solicitor s Civil cases go to Office of the Solicitor of Labor in-house DOL counsel The Investigative Authority of DOL Statutory grant of power ERISA section 504 Comprehensive Crime Control Act of 1984 Disclosure of information by the DOL Subpoena Authority ERISA Section 504(c) 5

EBSA Enforcement Statistics For FY 2016, EBSA reports: Oversight extends to 681,000 retirement plans Over $777 million recovered for direct payment to plans, participants, beneficiaries Over 2,000 civil cases closed 62 federal lawsuits filed 333 criminal investigations closed 96 indictments Why is EBSA Investigating the Plan, the Employer, the Service Provider and/or Other Individual? The investigator won t (isn t supposed to) tell you Investigations occur as a result of: Employee/participant inquiries/complaints Targeted enforcement projects at the National and Regional Office levels Info on Form 5500s e.g., large amount of other assets and numbers that don t make sense Referrals from the IRS and/or other gov. agencies News and social media notice of bankruptcy Are investigations ever random? 6

Investigation: Targets, cont d All Types of Employee Benefit Plans: Retirement Health Apprenticeship Legal Plan Sponsors Plan Trustees Investigation: Targets, cont d Named Fiduciaries Functional Fiduciaries Plan Administrators Service Providers Consultants Investment Advisors Custodians Directed Trustees 7

Investigations: Focus Potential breaches of ERISA fiduciary duty Violations of: ERISA 404 Fiduciary Duties ERISA 406 Prohibited Transactions ERISA 405 Co-Fiduciary Duties ERISA Part 7 Health Plan Requirements Investigations: What Are They Finding? Common Scenarios: Delinquent Employee Contributions still a BIGGIE! Excessive Service Provider Fees Imprudent Investments for all sorts of reasons Plan Sponsor Bankruptcies Part 7 Violations in Health Plans Abandoned Pension Plans Hard to Value Assets Fiduciaries that didn t know/fulfill their duties and many who didn t know they are fiduciaries! 8

National Enforcement Priorities Major Case Enforcement Priority EBSA continues to focus its enforcement resources on areas that have the greatest impact on the protection of plan assets and participants' benefits. In FY 2016, EBSA will remain dedicated to strategically focusing more investigative resources on professional fiduciaries and service providers with responsibility for large amounts of plan assets and the administration of large amounts of plan benefits. This continues to be accomplished by a national enforcement priority that directs investigative resources to the conduct of major cases. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/enforcement National Enforcement Priorities, cont d Employee Contributions Initiative Consistent with its long history of protecting employee contributions to 401(k), health care, and other contributory plans, EBSA designated the investigation of delinquent employee contributions, a previous national project, as a national enforcement priority. For more information, see the Employee Contributions Initiative webpage. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/enforcement 9

EBSA Enforcement Projects National Enforcement Projects: Employee Contributions Contributory Plans Criminal Project Plan Investments Conflicts Health Benefits Security (Part 7) ESOPs Bankruptcy (REACT) Abandoned Plans Voluntary Fiduciary Correction Program (VFCP) Contributory Plans Criminal Project Target the most egregious and persistent violators Protect the most vulnerable populations Issues: Employers convert employee payroll contributions for personal or business use Third parties gain access and use funds for their own financial gain Identity theft or tampering with personal data records 10

BK & Financially Distressed Plan Sponsors Rapid ERISA Action Team (REACT) Preserve plan assets Determine whether the sponsor has made all required contributions Ensure plan s rights are protected Identify responsible fiduciaries Plan Investment Conflicts Project Focus: Potential civil and criminal violations arising from the receipt of improper or undisclosed compensation by employee benefit plan consultants and investment providers Expanded to include the investigation of conflicts of interest in relation to plan asset vehicles Do plan fiduciaries understand the compensation and fee arrangements they enter into? Plan investment guidelines Proper selection and monitoring of service providers 11

Plan Investment Conflicts, cont d Project is intended to ensure that plan fiduciaries and participants receive comprehensive disclosure about service provider compensation and conflicts of interest EBSA will also conduct criminal investigations of potential fraud, kickback, and embezzlement involving advisers to plans and participants Plan Investment Conflicts, cont d The Department of Labor is focusing on service providers because of: the observations of prohibited transactions by service providers; a growing awareness of the significant influence that service providers have over retirement plan operation; and concerns over conflicted advice that adversely impacts participants 12

Plan Investment Conflicts, cont d What is the DOL looking for? The DOL says that these investigations: seek to determine whether the receipt of such compensation, even if it is disclosed, violates ERISA because the adviser/consultant used its position with a benefit plan to generate additional fees for itself or its affiliates the project will also seek to identify potential criminal violations, such as kickbacks or fraud [Emphasis added] National Office Enforcement Project Re Form 5500, Schedules H and I In reporting financial information, plan administrators must now indicate whether any participants failed to start benefits on time ( failed to provide any benefits when due ) and if so, the total amount paid late or still outstanding This new requirement is buried in instructions for Schedules H and I (line 4L) Administrators answering Yes should anticipate receiving a compliance check letter from the IRS Employee Plan Compliance Unit (EPCU) 13

National Office Enforcement Project Re Form 5500, Schedules H and I, cont d DB plan administrators reporting a large amount paid late may be targeted for investigations by the DOL Proposed posed changes to Form 5500 for 2019 would clarify that the plan administrator should not respond Yes to this question if the only benefits not paid are those owed to missing or lost participants and the plan fiduciaries have acted in compliance with FAB 2014-01 to attempt to locate the participants Query: What are the implications of this new requirement on an administrative errors that result in underpayments? National Office Enforcement Project Re Form 5500, Schedules H and I, cont d The new Form 5500 requirements raise compliance issues regarding: Minimum Required Distributions under Code section 401(a)(9) primarily an IRS concern and EPCU is sending out follow-up letters Underpayments of benefits both an IRS and a DOL target Whether the correct forms of benefit are being provided per the plan s terms (both and IRS and DOL target) FAB 2014-01 compliance DOL target 14

Enforcement Project Re Form 5500, Schedules H and I - Action Steps for Plan Sponsors & Plan Administrators: Review plan terms and administrative practices regarding: When the plan requires terminated participants to start taking benefits When the plan requires actively employed participants to start taking benefits, once they ve reached NRA or beyond April 1 of the year following the year they attain 70.5 In what form must terminated DC plan participants take their benefits? (lump sum or RMD only?) What steps are taken to ensure benefits start at RBD? Enforcement Project Re Form 5500, Schedules H and I - Action Steps, cont d How are participant ages being tracked? Is the process sufficient? (Notices being given timely re retirement and RBD?) Do holes in employee data need to be plugged? What are the procedures for addressing missing participants? FAB 2014-01 compliance? 15

Enforcement Project Re Form 5500, Schedules H and I - Action Steps, cont d Does the plan provide for deemed forfeitures? If not, should it be amended to do so? Does the plan provide for a default IRA option or escheat? How is the issue of uncashed checks addressed? What s the procedure? Regional Office Enforcement Projects Trends Late deposit of elective deferral contributions & loan repayments noted on Form 5500 Letter invitation to correct under VFCP: there are nice and not-so-nice versions of this letter, depending on the Regional Office involved When this initiative first rolled out (in Philadelphia), it was focused on large plans now plan size doesn t appear to matter Initiative spreading to at least Boston and San Francisco 16

Regional Office Enforcement Projects Trends, cont d Large Defined Benefit Plan Project (started in Philadelphia, but it s spreading) Focus is on procedures in three areas: (i) locating missing participants; (ii) informing deferred vested participants that a retirement benefit is payable; and (iii) commencing benefit payments when the participants reach age 70.5 Regional Office Enforcement Projects Trends, cont d Large Defined Benefit Plan Project, cont d How should this initiative be addressed? Review plan procedures for locating plan participants and filling in gaps in plan records Approach the issues more comprehensively as part of a plan compliance review, including fiduciary training 17

Regional Office Enforcement Projects Trends, cont d Excessive Fees Initiative Started in Philadelphia, but it has really become a national initiative now Reviewing disclosures and records to determine whether participants are paying higher than average fees Are the fees justified? If not, who is at fault? Service provider? Named fiduciary? Regional Office Enforcement Projects Trends, cont d Benefit Distributions Initiative (primarily Boston, but spreading) Established to determine whether plan administrators are following the terms of the plan document related to form and timing of distributions upon death, disability or termination of employment and whether plan administrators are monitoring to ensure that checks are cashed and not stale Goal of the Initiative: To ensure that plan fiduciaries are acting in accordance with FAB 2014-01 18

Investigative Process EBSA Investigative Procedure See EBSA Enforcement Manual - on website https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/enforcement/oe-manual Complaints Leads, Referrals Investigate? Form 5500 Targeting 19

Complaints Leads, Referrals Form 5500 Targeting Investigate? yes Appointment no Documents End Interviews Investigative Process Start of the investigation Typically a phone call from the Investigator, followed by confirmation letter setting forth Date & time of visit Plan(s) to be reviewed Request for records / documents needed Varies depending on issue If don t cooperate, anticipate a subpoena You may even want an accommodation subpoena 20

Document & Information Requests, cont d Typical Requests Required Reporting 5500s, Annual Funding Notices, SBCs, Participant Statements, SARs CPA Audits Fidelity Bond/Fiduciary Liability Policy Service Provider Contracts Governing Plan Documents Plan, Trust, Amendments, SPDs and SMMs Document & Information Requests, cont d Plan Contribution Records Meeting Minutes Participant Loan Records Income/Expenses/Journals Appraisals Correspondence/E-mails 21

Document and Information Requests, cont d Bank Accounts/Statements Investment Accounts/Statements Real Property Records Securities/Bonds Claims Adjudication Records Investigation Location and Process Most investigations will include an on-site review of documents Usually at primary place of business Can last days or weeks or many months! May split up retirement plan and H&W plan investigations Investigator may (will likely) conduct interviews 22

Investigation Interviews Typically held on-site Voluntary Not recorded Not under oath Can the plan s/the Employer s attorney be present? Investigation Interviews, cont d Typical interview subjects: Plan Administrator May interview several people who perform different functions Trustees If board usually designee or officers; could interview all Fiduciaries Plan Sponsor Human Resources Personnel 23

Potential Areas of Investigation Fiduciary Duties roles and fulfillment of various duties Co-fiduciary Liability Plan Expenses and Operations Plan Investments Prohibited Transactions Employer Securities Real Estate Holding Claims Procedures Bonding, Reporting, Disclosure Were required notices provided 510 Violations: Whistleblower Document Requests Plan Document, SPD and Trust Agreement Form 5500 (last 3 years) Payroll/contribution records Accountant s Records Service Provider Agreements and Contracts Benefit Statements and Benefit Payment Records Minutes of Meetings Plan Asset Records, including appraisals Fidelity Bond and Fiduciary Liability Insurance Policy IRS Determination Letter 24

Interviews with Plan Fiduciaries Explain fiduciary decisions Describe processes Forwarding employee contributions Benefit payments Expenses Investments Identification of service providers Be sensitive to the issue of making false statements 18 USC Section 1001 Complaints Leads, Referrals Form 5500 Targeting Investigate? yes Appointment Documents Interviews no End no Violation? Closing letter yes Notice letter 25

End Violation? yes Closing letter Notice letter Penalty Referrals Proof of correction yes Adequate? Proposed correction End Violation? yes Closing letter Notice letter no Penalty Referrals Proof of correction yes Adequate? Proposed correction 26

Resolution of the Investigation In most cases there will be a letter from EBSA reporting the results: No action: no findings and issuance of closing letter No action: findings, but issuance of closing letter Voluntary Compliance Request Correction of Violations The Plan must be made whole Prohibited Transactions corrected Correction of Violations Civil Penalties ERISA Section 502(l) DOL to assess 20% penalty on amounts recovered through settlement agreement or court order EBSA has limited discretion to waive or reduce penalty Penalty offset by PT excise tax paid 27

Voluntary Compliance Offered and encouraged in most investigations Work with the investigator to correct identified issues Be receptive to changing fiduciary processes and administrative procedures Be receptive to adopting policies and procedures reasonably geared to facilitate compliance Actually enforce relevant policies and procedures Restore assets as necessary Repay monies as necessary Correct prohibited transactions ASAP Voluntary Compliance, cont d Fully and respectfully respond to any VC letter Address all issues raised by the EBSA Include and relevant and reasonable defenses Describe voluntary compliance actions taken and to be taken Include all relevant exhibits 28

Voluntary Compliance, cont d If the issues are addressed to EBSA s satisfaction, it will issue a No Action letter Are voluntary compliance actions taken in response to a VC letter a settlement in nature, such that the 502(1) penalties apply? Voluntary Compliance Guidelines Full correction Paid within one year Any repayment schedule requires use of PTE 94-71 Use of appropriate interest rate Commitment for future compliance 29

Correction of Violations Depending upon the circumstances, EBSA may seek Correction of prohibited transactions Restoration of losses Payment of penalties Removal of fiduciaries Removal of service providers Appointment of independent fiduciary Implementation of new internal controls Supplemental benefit distributions Final accounting End Violation? yes Closing letter Litigation Notice letter no Penalty Referrals Proof of correction yes Adequate? Proposed correction 30

Resolution of the Investigation, cont. Referral to Solicitor s Office for civil litigation Referral to U.S. Attorney s Office for potential Criminal prosecution Referrals IRS Coordination Agreement and Statute requires: referral of prohibited transactions to IRS IRC 4975 excise tax referral of potential issues affecting tax qualified status Office of Chief Accountant PBGC SEC Perhaps other agencies 31

Complaints Leads, Referrals Form 5500 Targeting Investigate? End no yes Appointment Documents Interviews Closing letter no Violation? yes Litigation Notice letter no Penalty Referrals Proof of correction yes Adequate? Proposed correction Voluntary Fiduciary Correction Program VFCP is not available if the plan is already under review by EBSA Covers specific transactions, such as delinquent employee contributions purchase or sale between the plan and a party in interest loan between the plan and a party in interest excess fees paid Must meet specific correction requirements 32

So, How Do You Best Prepare For An Investigation? Conduct a pre-investigation, investigation (sort of a mocked investigation) Note: You should be conducting regular compliance reviews regardless of whether you re facing a DOL investigation or and IRS examination Conduct mocked interviews of those likely to be interviewed If it s been a while since those in charge of the plan have undergone fiduciary training, get them trained! So, How Do You Best Prepare For An Investigation? cont d Carefully review all documents to be presented --- and only provide what has been requested To the extent reasonably possible, fix errors before the active investigation begins --- or ASAP thereafter Note: You should be (as part of your regular compliance reviews) self-correcting problems ASAP in any event. Self-correction is your most powerful compliance tool, regardless of whether the issue arises under Title I or Title II of ERISA. Why? Oh, let me count the reasons! Consider whether and how to voluntarily disclose problems that have been fixed 33

So, How Do You Best Prepare For An Investigation? cont d Consider whether and how to voluntarily disclose problems that have not yet been fixed Assess whether the amount/type of information can be negotiated Consider whether an accommodation (administrative) subpoena would be prudent Always be mindful of the potential application of ERISA 501(l) penalties if there is a settlement. Issues to Keep in Mind Internal Revenue Service Has Its Separate Job to do DOL only acts on its own behalf Issues identified in connection with DOL investigation could raise tax qualification and excise tax concerns Excise tax and tax qualification issues are referred to IRS In DOL Inv., always be preparing for an IRS exam! 34

Issues to Keep in Mind, cont d Participant Complaints DOL actions do not necessarily resolve Plan participants ERISA rights or prevent them from filing a lawsuit But, participants can t get same recovery twice Contact Points EBSA website: www.dol.gov/agencies/ebsa Technical Assistance nationwide: 1-866-444-EBSA (3272) Publications: 1-800-998-7542 35