Case Studies in Ethics & Professionalism Presented by Adam C. Pozek, ERPA, QPA, CPFA DWC ERISA Consultants, LLC 651.204.2600, ext. 107 Adam.Pozek@DWCconsultants.com ASPPA Spring Virtual Conference April 21, 2016
ASPPA Spring Virtual Conference April 21, 2016 Case Studies in Ethics and Professionalism For each of the case studies described below, assume that you are a non-fiduciary TPA, servicing defined contribution plans. The plans in these examples are calendar year 401(k) plans. Case Study No. 1 Growing Pains You just found out you won a block of 50 new plans from a referral source you ve been courting for several years, and she wants you to take over immediately and do the work for the 2015 plan year. The challenge is that you were already at capacity before one your top administrators quit last week. You need to hire quickly but don t have the time to go through your regular, detailed recruiting/interview process. You just need to get the work out the door, so you consider hiring the first two candidates who present themselves Mike and Carol. Mike has 10 years of experience working for Seaver Pensions across town, but recently left that position. As a bonus, he tells you that he can bring over a small group of clients who are loyal to him. Since you know the owner of Seaver Pension, you make a telephone call to ask about Mike. You learn that while being very bright, Mike preferred to do things his way and that he was fired for taking too many shortcuts. In fact, several of Seaver s clients complained about Mike making mistakes. It also comes to light that Seaver requires all of its employees to sign non-complete agreements. Carol recently graduated from the local university with an accounting degree. She had a summer internship at a CPA firm but has no experience dealing with qualified retirement plans. While Carol would be an excellent candidate, you know you will have little time to do any training over the next few months. She assures you, however, that she will read the Form 5500 Instructions cover to cover and take an online course to cover the basics before she starts work. 1. Should you hire Mike? 2. Should you hire Carol? Page 1
Case Study #2 What s the Worst That Could Happen? Thanks to an investment advisor who is a key referral source for your company, Crusher & McCoy, P.C. (a 350+ participant medical practice) has just hired you to provide TPA services for its 401(k) plan. There will also be a change in recordkeepers. In addition to the 401(k), C&M also sponsors a traditional defined benefit plan, the actuarial work for which is performed by a large, national financial institution. You do not provide services to DB plans, so you don t mind that C&M prefers to keep the DB plan with the national provider. During the conversion of the 401(k) plan, it comes to light that said national firm has made some rather significant mistakes with respect to benefit calculations as well as the actual distribution of benefits. It also comes out that the C&M s accounting firm has reluctantly been preparing the Form 5500 for the DB plan, because the actuarial firm will not prepare it. Due to the other plan-related changes, the CPA sees a great opportunity to extricate itself from providing this service. The investment advisor, faced with having to bring another new provider into the mix, asks if you would be willing to prepare the Form 5500 for the DB plan. He suggests that if you will not, C&M might get fed up and move everything to a bundled arrangement. 1. Can/should you accept the engagement? 2. Are there any special circumstances or caveats that apply? 3. Does the analysis change if, to your knowledge, there have not been any previous mistakes made by the national firm? Case Studies in Ethics & Professionalism Page 2
Case Study #3 Did We Forget To Mention That? Spiders From Mars, Inc. sold all of its assets to Scary Monsters, Inc.; however, Ziggy (the owner of SFM) is going to keep the company intact to pursue a new venture that he expects to generate significant income over 2 to 3 years. After that, Ziggy intends to dissolve the company. Five of the employees will remain at SFM; the other several hundred terminate employment on Friday, March 29 th and begin working for Scary Monsters on Monday, April 1 st. In November of that year, the investment advisor asks if you will take over as TPA for the SFM plan, which is one of his largest clients. He explains that because of the short-term nature of the project they are working on and the goal to eventually wind down the company, your services will likely only be needed for 2 or 3 years; however, no mention is made of the asset sale 8 months prior. You thank the advisor for the referral, send out your regular service agreement along with any requisite caveats or additional fees in anticipation of the termination of the plan in a couple years. SFM signs the agreement, and you begin collecting all of the regular takeover paperwork plan documents, prior testing, etc. As you are wrapping up the conversion, Ziggy mentions something about having sold the company and that some former employees are asking about getting access to their balances. Before you can inquire about this new tidbit of information, the advisor reminds Ziggy that they told all of the former employees that they had to wait to take distributions until the earlier of SFM s dissolution or their termination of employment with Scary Monsters. Not wanting to second-guess the advisor in front of Ziggy, you have a separate phone call in which he gives you the details about the asset sale and confirms what participants were told about distributions. He further states that since this is his largest client and he has recently gone through an expensive divorce, he can t afford the loss of income that would result if participants were allowed to take distributions right away. Even more interestingly, he tells you that he needs your help to get the former employees back on track with making their loan payments to the SFM plan since none have been made since the sale. When you explain that all of those loans have passed the cure period and would require a VCP filing to avoid the deemed distributions, he tells you he believes it would be a breach of his fiduciary duty to advise Ziggy to confess his sins to the IRS. Instead, he wants you think about the good of the participants and simply get the loans back on track without making a big deal out of it. 1. Knowing that this is intended to be a short term engagement (only 2 3 years), is it appropriate for you to charge an increased fee for the annual compliance/administration work? 2. Once you become aware that former employees are not being allowed to take distributions even though the plan permits immediate distribution on termination of employment, do you have an obligation to communicate the discrepancy to Ziggy even though it contradicts the advisor who referred you in? Case Studies in Ethics & Professionalism Page 3
3. Since the advisor is trying to avoid a surprise tax liability for the unsuspecting participants who are past due on their loans, are you able to help him get the loans back on track even though you know there is no intention to go through VCP or otherwise report the loans as deemed distributions? 4. Assume the advisor decides to go back to the previous TPA because they don t ask so many questions. Case Studies in Ethics & Professionalism Page 4
Case Study #4 Shake It Off? Swift, Inc. sponsors a 401(k) plan for which you have been the TPA for several years. Taylor has been the office manager for Swift for 20+ years, but she is not an owner or officer. She has been your contact for the plan for as long as you have worked on it, and the two of you have become pretty good friends over the years. Shortly after Swift funds its profit sharing contribution for 2014, you are reviewing the account of Bob, a participant who terminated in early 2015, and notice that no contribution was deposited for him despite the fact that he was on the allocation schedule you provided to Taylor. Since the plan has a last day rule, Taylor must have assumed Bob s recent termination meant he shouldn t receive an allocation even though he was employed at the end of 2014. You call Taylor and explain the situation to her, and she assures you she will take care of it right away. She was planning to pay off her participant loan anyway, so she could send in Bob s contribution at the same time. You take her at her word without giving it a second thought. As you approach the end of 2015, you run a quick contribution report and notice that the total profit sharing contribution ties out to the penny to what you calculated (including the amount for Bob). Taylor tells you Swift is eager to make its 2015 profit sharing contribution as quickly as possible and asks if you can expedite your year-end work. In the course of doing so, you discover that Bob s profit sharing contribution from 2014 was deposited into Taylor s account. You didn t notice before, because the total contribution was correct. You recall Taylor mentioning sending in her loan payoff at the same time, so you assume it was a simple oversight. You ve just finished the 2015 calculations, so you inform Taylor of the need to correct Bob s account at the same time you give her the allocation of the 2015 contribution. You really like Taylor and want to help her make sure everything is adjusted properly, so you give it a couple weeks before logging into the recordkeeper s website to make sure all is in order. Not only do you discover that Taylor/Bob discrepancy has not been fixed, but you also see that Taylor has since taken a new loan and paid it off already, which is odd because you never received notification from the recordkeeper that there was a loan request pending. You dig a little further and see that there are two participants who were there at the end of 2015 but terminated in early 2016 who did not receive their allocations for 2015. It turns out that the sum of the missed allocations for those two participants is exactly equal to the amount of the loan and subsequent payoff in Taylor s account. There are now a few too many accidents for your comfort. Even though you have never really worked much with Tom, the owner of Swift, you wonder whether it is appropriate to bring this to his attention. 1. What, if any, obligation do you have to bring your concerns to the attention of someone in a position of authority with respect to the plan? Case Studies in Ethics & Professionalism Page 5
2. Assuming you feel compelled to communicate the concern, is it sufficient to tell the recordkeeper or advisor rather than going over Taylor s head to Tom? 3. You eventually decide to discuss the matter with Tom, and he asks you to do a more detailed investigation and present him with a report of your findings, including all of the supporting calculations, account statements, transaction numbers, etc. You explain that you will need to charge for your time. He refuses to pay the additional fee but demands that you do the work, stating that if you would have paid closer attention, this never would have happened in the first place. Do you have an obligation to assist with the investigation without payment? 4. Is it appropriate for you to instruct the recordkeeper to freeze Taylor s account to prevent her from taking any more loans or in-service distributions until the issue is resolved? Case Studies in Ethics & Professionalism Page 6