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February 2, 2012
As auditors of employee benefit plans, we regularly see administrative and operational issues encountered by plans. Most of these problems can be corrected by changing internal monitoring procedures and by entering into various correction programs though the IRS and DOL. But plans, and the companies and employees which depend upon them, can encounter serious consequences if issues are not addressed.
Of the many issues we encounter, these are the most common, and those which plan administrators and trustees should be most aware.
ELIGIBILITY
The plan sponsor may misunderstand the definition of eligible compensation - and especially how to treat bonuses, overtime and shift differentials - for purposes of determining employee contributions and company matches. Related to this are questions of when employees are eligible to participate in the 401k or other defined contribution retirement plans. Plan administrators and trustees should be familiar with the legal plan documents in order to determine eligibility standards and the appropriate compensation to be used in determining benefits.
DEPOSITS
Another common problem relates to the timeliness of the remittance of participant contributions. Delaying the deposit of employee withholdings is a serious issue in the eyes of the DOL. Delays are interpreted by the DOL as the employer using funds to which they are not rightfully entitled, and are likely to trigger the greatest level of scrutiny. As a general rule, it could be expected that deposits into plans will be made simultaneously with - and certainly no later than a few business days following - the issuance of paychecks and payment of payroll taxes. For employers with multiple plans, deposits could inadvertently be made into the wrong plans. This occurs most frequently when plans are administered by multiple vendors. The plan sponsor should ensure that contributions are deposited into the right participant’s accounts and they should have procedures in place to prove total plan deposits to the payroll records.
VENDOR CONTROLS
With many companies relying on third party vendors to administer their plans, they should be aware that a vendor's own SAS 70 only compliments the user controls in place at the plan sponsor. Plan administrators should conduct their own oversight of vendor controls and insure that the anticipated user controls are in place.
PLAN DOCUMENTS
We frequently find that critical plan documents have neither been signed nor legally executed. Plan administrators should check with the plan's legal counsel to be certain this has been done and obtain an executed copy of all documents for their files.
INVESTMENT STRATEGY
Trustees often fail to fully appreciate that they have a fiduciary duty to understand the plan's investment strategy and why investments have been selected. This fiduciary duty thus requires that trustees carefully monitor fund performance and raise questions with administrators over funds that are underperforming or perceived as involving exceptionally high levels of risk. These actions are required of trustees to adequately discharge their duty to prudently select investments, and to minimize any liability for fund failures or underperformance.
COMPLEXITY
This due diligence extends doubly for oversight over alternative investments, including hedge funds and other more esoteric financial instruments. These instruments are more difficult to monitor because they are neither publicly traded nor subject to the same level of disclosures, and their complexity may prove difficult for plan trustees to completely understand the true nature of the investment.
FEE STRUCTURE
The fee structure of investments is another area that is often not understood nor carefully scrutinized by plan administrators and trustees. This can lead to much higher costs being incurred by the plan, especially because these fees are often hidden as part of investment gains or losses. It is not necessary to go with the low cost provider, but the trustees need to ascertain that they are receiving appropriate value for the services being provided. In 2012, 401k plans will be required to disclose all of the investment fees assessed to a plan participant. It would behoove plan administrators to get a handle on these fees now and incorporate these fee levels into their assessment and selection of different funds.
LOW BALANCE ACCOUNTS
As plan administrators become more sensitive to the fee structures of different funds, they should determine if they are incurring relatively high fees on small balance accounts. Many plans permit administrators to pay off low balance accounts, which can cut the total and relative fees being paid by a fund.
CORPORATE ENTITIES
With corporate structures becoming ever more complex, it is important that plan administrators be sure to sign and execute adoption agreements to allow any newly created entities to participate in the plan.
AUTO ENROLLMENT
Finally, we have found instances where employers have incorrectly implemented automatic enrollment provisions, either by failing to notify employees of opt-out options or to commence deductions and plan contributions on time.
Employee benefit plan administrators and trustees have responsibilities to comply with IRS and DOL regulations. Problems in any of the areas discussed above can result in fines or a changing of the tax status of the plan, resulting in major consequences for employers and employees alike.
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Anthony T. Carideo Jr., CPA is a Member of the Firm at Wolf & Company, P.C. and provides assurance, tax, and accounting services. He can be reached at 617- 428-5405 or by email to acarideo@wolfandco.com.
