Presenting a live 110 minute webinar with interactive Q&A Retirement Plan Audit Strategies Revising Audit Roadmaps Based on 403(b) Regs, Form 5500 Changes and New Transitional Guidance WEDNESDAY, NOVEMBER 17, 2010 1pm Eastern 12pm Central 11am Mountain 10am Pacific Td Today s faculty features: Alicia Schmidt, Manager, Employee Benefit Assurance Services Group, LarsonAllen, Minneapolis, Minn. Kriste Naples-DeAngelo, Partner, Pension Services Group, EisnerAmper LLP, Bridgewater, N.J. Scott Tuxbury, Director of Retirement and Investments, New Wealth Advisors, Tewksbury, Mass. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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Retirement t Plan Audit Strategies t Webinar Nov. 17, 2010 Alicia Schmidt, LarsonAllen aschmidt@larsonallen.com Kriste DeAngelo, EisnerAmper LLP deangelo@amper.com Scott Tuxbury, New Wealth Advisors stuxbury@newwealthadvisors.net 4
Today s Program Background: 403(b) Regs, Form 5500, Guidance [Alicia Schmidt] Slide 6 Slide 23 When An Audit Is Required [Kriste DeAngelo] Slide 24 Slide 51 Plan Document Requirements And Fiduciary Responsibilities Slide 52 Slide 67 [Scott Tuxbury] Experiences With Recent Audits [Alicia Schmidt, Kriste DeAngelo and Scott Tuxbury] Slide 68 Slide 70 5
Alicia Schmidt, LarsonAllen BACKGROUND: 403(B) REGS, FORM 5500, GUIDANCE 6
Agenda For This Section After this session you will better understand: 403(b) regulations and their impact Form 5500 changes and their impact Relevant guidance from the DOL and its impact Allen LLP 2010 LarsonA 7
Final 403(b) Regulations: Overview IRS regulatory changes Issued July 26, 2007 First comprehensive regulations in 43 years Effective for taxable years beginning after 2008 Jan. 1, 2009 for calendar-year plan July 1, 2009 for June 30 plan year-end Allen LLP 2010 LarsonA 8
Final 403(b) Regulations Overview (Cont.) DOL regulatory changes In November 2007, the DOL eliminated the exemption granted to 403(b) plans from the annual Form 5500 reporting, disclosure and audit requirements. Effective for plan years beginning g on or after Jan. 1, 2009 403(b) pension plans may now subject to Title 1 Certain 403(b) plans will be subject to an independent audit, similar to 401(k) plans 2010 LarsonA Allen LLP 9
Impact Of Final 403(b) Regulations Title 1 of ERISA defines a retirement plan as any plan, fund or program established by an employer that provides retirement income to employees or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond. Allen LLP 2010 LarsonA 10
Impact Of Final 403(b) Regulations (Cont.) ERISA Title 1 Many 403(b) plans of tax-exempt 501(c)(3) organizations are subject to ERISA. ERISA Title 1 does not apply to: Governmental plans Certain church plans Tax-exempt employers with 403(b) plans not considered to constitute the establishment or maintaining of an employee pension benefit plan under ERISA (DOL safe harbor exemption) 2010 LarsonA Allen LLP 11
Impact Of Final 403(b) Regulations (Cont.) DOL safe harbor exemption Deferral-only function by employer does not constitute an ERISA 403(b) plan A deferral-only function is defined by ERISA as: Employee participation is voluntary Employee can enforce vendor contract without employer s assistance Employer receives no unreasonable direct or indirect compensation Employer s involvement is limited 2010 LarsonA Allen LLP 12
Impact Of Final 403(b) Regulations (Cont.) DOL safe harbor exemption (Cont.) Employer involvement is considered limited as follows: Letting vendors publicize products to employees Cannot dictate which vendors to use Requesting information concerning 403(b) products Summarizing or compiling employee information Collecting and remitting deferrals to vendors Maintaining records (e.g. deferral/plan records) 2010 LarsonA Allen LLP 13
Impact Of Final 403(b) Regulations (Cont.) DOL safe harbor exemption (Cont.) Plans will not meet DOL safe harbor exemption, and will be subject to ERISA, if: One of the safe harbor exemption requirements is not met The plan provides for employer contributions The employer acts on behalf of participants in facilitating or resolving issues with vendors, e.g. threatens to move employee accounts from vendor The level of employer involvement is, or could be concluded as is, more than what is limited under the exemption requirements Example: Approval of distributions 2010 LarsonA Allen LLP 14
Form 5500 Recent Form 5500 requirements Effective for plan years beginning on or after Jan. 1, 2009 Form 5500 required to be electronically filed starting in 2009 Due 7 months after plan year end (12/31 plan year due 7/31) Can be extended an additional 2 ½ months (12/31 plan year extended to 10/15) Prior filings only included first three pages of the Form 5500 Only certain sections applied Additional schedules applicable in addition to the first three pages Schedule A Schedule C Schedule D Schedule H Schedule I Schedule R 2010 LarsonA Allen LLP 15
Form 5500 (Cont.) Form 5500 (first three pages) Participant counts Determines if it is a small or large plan (audit implications) General rule Small plan = Fewer than 100 participants at the beginning of the plan year Large plan = 100 or more participants at the beginning of the plan year Identify the benefits provided by the plan (use codes) Identify the plan funding and benefit arrangement Identify which schedules are applicable and included 2010 LarsonA Allen LLP 16
Form 5500 (Cont.) Schedule A: Insurance information Complete if plan holds insurance products for investments Pooled separate accounts Investments in general accounts of insurance companies Schedule C: Service provider information Complete to report persons who received, directly or indirectly, $5,000 or more in compensation in connection with services rendered or position with the plan Complete if there is a termination of an accountant or actuary 2010 LarsonA Allen LLP 17
Form 5500 (Cont.) Schedule D: DFE/participating plan information Complete if plan holds direct filing entities as investments Pooled separate accounts Common collective trusts Master trust investment accounts 103-12 investment entities Schedule H: Financial information (large plans) Balance sheet and income statement for the plan Indicates what type of audit opinion the plan received Yes/No questions relating to transactions during the year and other ERISA requirements 2010 LarsonA Allen LLP 18
Form 5500 (Cont.) Schedule I: Financial information (small plans) Abbreviated balance sheet and income statement for the plan Yes/No questions relating to transactions during the year and other ERISA requirements Schedule R: Retirement plan information Discloses information about benefit payments made from plan Questions relating to funding information for plans subject to minimum funding requirements Question relating to coverage tests performed for the plan 2010 LarsonA Allen LLP 19
DOL Guidance DOL Field Assistance Bulletin (FAB) 2009-02 403(b) plan does not need to include certain contracts or accounts as plan assets on the Form 5500, provided that: Contract or account was issued to a current or former employee before Jan. 1, 2009 Employer ceased to have any obligation to make contributions (including employee salary reduction contributions) and ceased making contributions prior to Jan. 1, 2009 All rights under the contract or account are legally enforceable by the individual owner of contract or account without employer involvement Individual contract owner is fully vested in contract or account 2010 LarsonA Allen LLP 20
DOL Guidance (Cont.) DOL Field Assistance Bulletin (FAB) 2009-02 (Cont.) Contracts or accounts are not required to be excluded. Plan administrator needs to determine and ensure criteria are met. Must meet all four criteria Applies to both large and small plans 5500 reporting relief only; will likely have a modified audit report 2010 LarsonA Allen LLP 21
DOL Guidance (Cont.) DOL FAB 2010-01 Issued on February 2010 Provides additional guidance to FAB 2009-02 If the auditor discovers contracts were incorrectly excluded, the DOL expects the auditor to alert plan administrator. Relief extends beyond the 2009 reporting year. 2010 LarsonA Allen LLP 22
DOL Guidance (Cont.) DOL Advisory Opinion 2010-01A Issued on March 4, 2010 Response to TIAA-CREF request if TIAA traditional annuity is a fully allocated contract DOL concluded the contract is unallocated For plan years beginning i on or after Jan. 1, 2009, must be reported as plan assets on 5500 (do not have to amend prioryear filings) 2010 LarsonA Allen LLP 23
Kriste DeAngelo, EisnerAmper LLP WHEN AN AUDIT IS REQUIRED 24
Agenda For This Section Objective of the audit What is audited? Limited scope audit vs. full scope audit Investments Participant data First year considerations How to prepare for the audit What to expect from the auditor What the auditor expects from you Suggestions and best practices 25
403 (b) Plans Important Items To Note The general goal of the 403(b) regulations was to conform 403(b) plans with the rules applicable to 401(k) plans. Form 5500 filings will be required for all 403(b) plans covered by Title I of ERISA (as under previous rules). They are now subject to the same 5500 annual return requirements as are 401(k) plans. Even plans with fewer than 100 participants must file Form 5500 and provide financial information, at the plan level, that was never provided before. No change on WHO should file Form 5500 Change only on WHAT should be filed with Form 5500 26
Is Your Plan An ERISA Plan? IF YOU ARE UNSURE, SEEK LEGAL COUNSEL!!!!!!!!!!!! 27
What Is The Objective Of The Audit? To express an opinion on whether the plan s financial statements are presented fairly, in all material respects, and in conformity with U.S. generally accepted accounting principles The auditor is responsible for planning and performing the audit to obtain reasonable assurance that material misstatements are detected. Reasonable assurance is high but not absolute The audit is conducted in accordance with auditing standards generally accepted in the U.S. 28
What Is The Objective Of The Audit? (Cont.) Generally accepted auditing standards include, among other things: Gathering information to understand the plan and its internal control environment Understanding the design and implementation of internal control Detailed testing of a plan s accounts and transactions Gathering sufficient audit evidence Documentation of findings The financial statements are the responsibility of plan management; the opinion is the responsibility of auditors. 29
What Is Audited? Two basic buckets (investments, and participant accounts and activity) Investments Participants Opening balance Eligibility Contributions Distributions Transfers in and out Earnings allocations Fund allocations Vesting Ending balance Timeliness of contributions Prohibited transactions 30
What Is Audited? (Cont.) Think in terms of the financial i statement t t line items. Statement of net assets available for benefits Investments Participant loans Receivables (accrual basis) Participant contributions Employer contributions Income Liabilities (not for benefits) Accrued expenses 31
What Is Audited? (Cont.) Statement of changes in net assets available for benefits Contributions (received and receivable) Timeliness of deferrals Rollovers Gains and losses/appreciation and depreciation on investments Investment income Interest and dividends Distributions ib ti Administrative expenses Transfers/plan mergers 32
What Is Audited? (Cont.) The focus of the audit is on the material account balances and major transaction classes from which the statements are derived. Participant activity is a major transaction class/ Opening balance, eligibility, demographics, contributions, vesting, distributions, transfers, rollovers, fund allocations, earnings allocations, ending balance. Focus on investments is driven by the audit scope. 33
What Is Audited? Limited Scope Vs. Full Scope Investments - Limited scope or full scope audit Limited Scope: Assets are held by a bank, insurance company or trust company, and are certified as to completeness and accuracy. Custodians certify the information as contained in their ordinary books and records. If you have more than one custodian, you will need multiple certifications. Custodians generally provide values based on best information available. Watch as of dates for old information Watch fair value The auditor has no responsibility to test investments, investment activity and related transactions; it is the plan sponsor s responsibility to ensure that the investment values are proper. 34
What Is Audited? Limited Scope Vs. Full Scope (Cont.) Full Scope: Audit investments, investment activity and related transactions Confirm existence and ownership, assure no liens, no pledges or other security interests Reasonably conclude investment t transactions ti are recorded d and investments are valued in conformity with GAAP (fair value) Perform testing on purchases and sales Disclosures are proper 35
First Year Considerations DOL requires comparative statements of net assets available for benefits, even when the prior year was not audited. Will need 12/31/08 or 6/30/09 statement of net assets available for benefits, at a minimum, compiled (review or audit can be performed providing sufficient review or audit procedures are performed. Must determine that the accounting principles used by the plan in the current and preceding year are consistent Must address the opening balances at the participant level Must address multiple prior years activity for contributions, distributions and plan activity 36
First Year Considerations (Cont.) Address completeness and accuracy of participant data and records Address eligibility, types of benefits, participant p account balances Going back in time presents a unique difficulty for 403(b) plans, given the possible recordkeeping shortfalls. Gather complete and accurate information from all vendors, for all years Former employees and former vendors Orphan contracts and missing participants 37
First Year Considerations DOL Transition Relief Field Assistance Bulletin (FAB) 2009-02 Provides enforcement relief for 5500 filings Does not provide audit relief ERISA and current regulations require the audit to be performed in accordance with GAAS DOL/EBSA will NOT reject a 403(b) plan Form 5500 filing solely because the auditor s report is qualified, adverse or disclaims an opinion (other than allowed under 29 CFR 2520.203-8) due to the exclusion of pre-2009 annuity contracts and/or custodial accounts. Regardless of the type of opinion issued, the auditor is still required to complete all other audit procedures (e.g., contributions, distributions). 38
First Year Considerations DOL Transition Relief (Cont.) You can use this relief to determine audit requirement. If omitting these contracts puts the plan below the audit requirement threshold, then an audit will not have to be performed. 80-120 rule also applies in determining audit requirement, so look at number of participants at 1/1/08. Some sponsors may not find a qualified, adverse or disclaimer of opinion acceptable. Some vendors will not be in a position to exclude contracts/account t t information that meets criteria. Generally, information is available within 2-3 months of year-end. 39
First Year Considerations (Cont.) A 401(k) audit from start t to finish i can take 1-2 months, with fieldwork generally one week or less. 403(b) timing and fieldwork could be double, though, given the initial time. Availability of SAS 70s must be addressed SAS 70s are reports on the design of internal controls (Type I) and operating effectiveness (Type II) at a service provider. Outline what user controls are required Controls of a benefit plan are composed of controls at the plan sponsor as well as at service organizations. Review by plan management at least annually, as part of the thirdparty service provider monitoring effort, is a good practice. 40
First Year Considerations Experience Of December 2009 Plan Year-Ends Challenges with organizations Difficulty obtaining information Lack of time urgency Confusion regarding what plans need an audit Confusion regarding what a non-erisa plan is vs. ERISA Additional providers cropping up Definition of compensation issues Eligibility issues Timeliness of contribution issues 41
First Year Considerations Experience Of December 2009 Plan Year-Ends (Cont.) Some positives Longevity of employees involved in plan management Deferral forms on file at the organization Payroll records on file at the organization Knowledge of payroll slot vendors/records Knowledgeable consultants getting involved Responsiveness of organizations to improving plan governance Willingness of organizations to engage ERISA counsel 42
Preparing For the Annual Plan Audit Complete Collaboration Plan Sponsor Service Providers TPAs Auditor 43
How To Prepare For The Annual Plan Audit Take control of the process! Know your responsibilities. The financial i statements t t are those of plan management; only the opinion is the auditor s. Hire a qualified independent auditor for your plan. If this is not provided by the auditor, request a list of schedules and documents the auditor will require prior to the start of the process. 44
How To Prepare For The Annual Plan Audit (Cont.) Contact t service providers early each year to assure they have the necessary information TO YOU on a timely basis. If you have not already contacted them for your 2009 plan audit, CONTACT THEM NOW! All individual participant contracts and account balances in your plan SAS 70 reports (Is it a Type I or Type II?) Information needed for 2008 compiled financial statements and information needed for opening balances testing Have a point person. Establish responsibility for the plan s financially reporting function (HR vs. Finance) 45
How To Prepare For The Annual Plan Audit (Cont.) Review information before it is provided to the auditor, to minimize the back-and- and forth Make sure plan participant records are complete and accurate Get your books and records in shape Establish proper internal controls over the plan s financial reporting process Ensure that the plan has an up-to-date, written plan document and an investment policy statement Ensure that the plan is in compliance with the plan s tax exemption 46
How To Prepare For The Annual Plan Audit (Cont.) Expect great tthi things!!(embrace the process) Communication throughout the process Innovative ideas Suggestions on enhancing procedures for efficiency and minimization of risk 47
How To Prepare For The Annual Plan Audit What To Expect From The Auditor List of schedules and documents required Inquiries Understanding of internal controls Risk assessment Requests for documentation of participant-level information Experience Knowledge of plan terminology Clear line of communication Helpful recommendations! 48
How To Prepare For The Annual Plan Audit What The Auditor Expects Of You Time Documentation requested Full analysis of vendors Full analysis of participant population Coordination of communication with third- party providers Make sure you know what reports they can provide, and for what period and on what level (plan vs. participant) What is their turnaround time for document requests? Financial statements 49
Suggestions/Best Practices Critical to employ fiduciary best practices, which are somewhat lacking in the 403(b) plan area Plan committees Meet regularly Keep written minutes Document fiduciary due diligence Investment policy statements ERISA attorney relationships Monitor service providers Employ effective internal controls 50
Helpful Web Sites And Tools Plan Sponsor magazine Profit Sharing Council of America (IPS) Employee Benefit Plan Audit Quality Center Web site: www.aicpa.org/ebpaqc Includes plan advisories for communication and research on plan responsibilities Includes tools for plan sponsors Your third-party provider www.dol.gov Employee Benefits Security Administration Office of the Chief Accountant: 202.693.8360 EFAST Help Line: 1.866.463.3278 51
Scott Tuxbury, New Wealth Advisors PLAN DOCUMENT REQUIREMENTS AND FIDUCIARY RESPONSIBILITIES 52
Fiduciary Process EDUCATION The law requires that plan fiduciaries become educated. A pure heart and an empty head is not an adequate defense. DOCUMENTATION All Compliance Related Activities MITIGATION Proper Education by plan fiduciaries and documentation of all compliance related activities will lead to fiduciary liability mitigation. 53
Who Is A Fiduciary? Examples Of Fiduciaries Retirement plan Committee members Trustees Board of directors Company officers HR director Retirement plan advisors Generally Not Fiduciaries Attorneys Accountants Actuaries Anyone making business decisions (whether to establish, amend, freeze, or terminate the plan). These individuals are acting on behalf of the business, and not the plan, in making these decisions. Functional fiduciary No express appointment or delegation of fiduciary authority, but is functionally considered in control or in possession of authority over the plan s management, assets, or administration 54
General Requirement Of Plan Fiduciaries At the heart of ERISA compliance is the duty of the plan sponsor (fiduciary) to act prudently. Procedural prudence is achieved in three ways: Take action Do Research and what is required to Document all understand keep the plan in compliance-related your responsibilities compliance activities 55
What Is At Risk? All plan fiduciaries are jointly and severely liable. All plan fiduciaries are personally liable. Homes Investments Stock Options Bank Accounts Unless protected t by a safe harbor, fiduciaries i i are liable for 100% of investment losses, measured against what assets would have otherwise grown to; fiduciaries are also liable for the legal expenses and professional fees for the defense. 56
10-Plus Steps To Proper Fiduciary Mitigation Fiduciary education steps Fiduciary overview Basic roles/responsibilities Prohibited transactions Roles of outside parties, attorneys and consultants Individuals prohibited from being a fiduciary Evaluating and terminating ti a fiduciaryi Fiduciary responsibilities 57 Carrying out duties prudently Following terms of plan documents Diversifying plan investments Appointing trustees and other individuals Reporting and disclosure requirements Purchasing a fidelity bond
10-Plus Steps To Proper Fiduciary Mitigation (Cont.) Fiduciary education steps Fiduciary liability Fiduciary liabilities explained Department of Labor penalties Co-fiduciary liabilities Breaches prior to or after being a fiduciary Individual fiduciary liabilities Prohibited transactions 58 Carrying out duties prudently Following terms of plan documents Diversifying plan investments Appointing trustees and other individuals Reporting and disclosure requirements Purchasing a fidelity bond
10-Plus Steps To Proper Fiduciary Mitigation (Cont.) Fiduciary education steps Minimizing risk Drafting an investment policy Indemnifying fiduciaries Education and documentation Hiring professional consultants Conducting audits Written investment policy 59 Written investment policy DOL and investment policies Reviews, monitoring and replacement Expenses and fees Conducting an audit Conclusion and action steps
10-Plus Steps To Proper Fiduciary Mitigation (Cont.) Fiduciary education steps Fees and expenses Plan fees and investment fees Management fees Fees and participant-directed accounts Disclosure requirements Retirement plan cost components Evaluation steps Participant-directed accounts 60 Fiduciary responsibilities and 404(c) eligible plans Exercising control and independent control Required disclosures Disclosures available upon request Investment options, instructions and mapping
10-Plus Steps To Proper Fiduciary Mitigation (Cont.)
10-Plus Steps To Proper Fiduciary Mitigation (Cont.) Fiduciary education steps Employer securities Qualified employer securities and property Limits on employer securities and property Diversification and notification Voting rights Buying or selling from a party in interest Blackout periods Blackout periods Period requirements Notification and content requirements Timing Changing the length of the blackout period 62
10-Plus Steps To Proper Fiduciary Mitigation (Cont.) Fiduciary education steps Employer securities Automatic contribution and default arrangements ERISA claims and appeals Categories of benefits and appropriate rules Rules applied to ERISA covered plans Fiduciary compliance steps QDROs and QDRO procedures 63
Documents Required 404(a): Fiduciary Duties Investment Policy Statement (IPS) 404(c): Protection for Participant Investment t Decisions i Broad Range of Investment Options Quantitative/Qualitative Fund Analysis Sufficient Investment Information/Education Prudently Select Investments Description of Fees and Expenses Consistently Implement Results 404(c) Policy Statement and Employee Notice Independently Monitor Investments Copy of Prospectus Defray Reasonable Expenses Description of Investment Alternatives and Fund Facts Follow Plan Document Voting and Tender Rights (if applicable) 64 The steps under ERISA Sections 404(a) and 404(c) are numerous and complex; please see Compliance Checklist for more detail.
Actionable Items To Ensure Compliance 404(a) Investment policy statement (IPS) executed IPS reviewed at least annually Quantitative/qualitative fund analysis completed and reviewed with plan fiduciaries at least annually Investment/fund recommendations reviewed at least annually Verify fund analysis and actions either follow procedures identified in IPS or have a documented, prudent reason for departure therefrom 65
Actionable Items To Ensure Compliance (Cont.) 404(c) 404(c) policy statement and employee notice executed and reviewed at least annually Policy statement and addendum given to all employees, detailing investment - related fees; reviewed at least annually Clear investment instructions given to employees Employees provided with sufficient information to make informed investment decisions Specific information for each investment provided to employees Employee communications process reviewed (enrollment and investment education) for appropriateness Consider custom investment allocations and advice for plan participants 66
Other Must-Dos General Identify all plan fiduciaries Retirement plan committee established Fiduciary education/update provided annually All plan fiduciaries attend at least one investment due diligence and fiduciary plan review meeting Minutes of every meeting documented and stored Decisions regarding provider, consultant, investment selection, plan design, etc. based on research and merit, and are for the exclusive benefit of all employees Decision regarding loans, withdrawals, distributions, deferrals and contributions are made in compliance with terms of the plan document. Fiduciary i plan review meeting held at least annually RFP/benchmarking of fees and services conducted every 2-4 years 67
Alicia Schmidt, LarsonAllen Ki Kriste DeAngelo, EisnerAmper LLP Scott Tuxbury, New Wealth Advisors EXPERIENCES WITH RECENT AUDITS 68
Experiences With Recent Audits I. Plan administrators carefully review plan records to ensure they can exclude pre-jan. 1, 2009 contracts II. Have auditor requests available early; contact TPA well in advance for audit package; don t hesitate to call the auditor III. Determine early who will prepare the Form 5500 69
Experiences With Recent Audits (Cont.) I. Ensure all plan documents are signed by current employees II. Employees who signed plan documents and then were separated from service are still liable. III. Using a retirement committee charter will mitigate that risk 70