Your auditor’s engagement letter details the expectations of the roles of both auditor and plan sponsor. Understand that if the scope of services changes, the engagement letter may need to be updated during the course of the audit. Because an update typically means more work for the accountant, that can translate to paying higher fees. So, it’s better to fully vet the issues before beginning by asking these questions:

1. Can we perform a limited-scope audit, or do we need a full-scope audit to satisfy the DOL?
2. Do we have all of the financial records up to date and easy to locate?
3. Do we need to file a Form 11-K with the Securities and Exchange Commission (SEC)?
4. Do we have a list of internal controls by which the auditor can assess the risks of material misstatement of the financial statements?
5. What is the auditor’s responsibility regarding supplemental schedules required by the DOL?
6. Is tax-exempt status an issue? If yes, will the auditor give an opinion regarding the plan’s qualification in that regard?
7. Will the auditor be responsible for information for the Form 5500 and/or Annual Report?
8. How will the auditor communicate ERISA compliance issues found during the audit – verbally or in writing?
9. What is the auditor’s responsibility regarding electronic filings?
10. Have we agreed upon estimated delivery time, fees and billing arrangements?

Asking these questions will set expectations and fulfill your fiduciary responsibility to your plan participants. We recommend keeping a written record of all correspondence and requesting verbal communications to be confirmed in writing.

Understanding and communicating plan fees is just one way to be a prudent fiduciary. Another way you can assure your plan participants of good financial management is to put your plan out to bid every two to three years. While this will require extra effort from the plan sponsor, the benefits can be worth the process to ensure reasonable fees and justify services. Some companies hire a third party consultant to handle the process, taking the burden off of the plan sponsor. However, the plan sponsor is ultimately responsible and will still need to prepare search information. Here are six steps to initiating a search:

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This year, when you make New Year’s resolutions, be sure to have one about checking on the fees you pay to administer your plan. Even a company like Walmart, with its extensive legal resources, recently agreed to pay $13.5 million dollars along with Merrill Lynch for a class action settlement. Without admitting any fiduciary wrongdoing, they agreed to eliminate funds from their plans that carried high fees. A few reminders:

1. Know what fees you pay and be prepared to justify them to your plan participants as well as the DOL.
2. Be sure that record-keeping fees are documented separately from investment management fees.
3. Diversify your plan portfolio, offering choices to plan participants.
4. Communicate all changes to your plan participants and employees – clearly and promptly to avoid any misunderstandings.

Your plan auditor is a good source of information about ways to keep your plan in top fiduciary shape. Another good resource is the AICPA’s Accounting and Auditing Resource Centers.

How to prepare for a new definition of fiduciary

By now you have probably heard that the DOL will announce changes to the definition of ‘fiduciary’ in early 2012. The purpose is to strike a balance between protecting consumer accounts from biased investment advice and allowing the securities industry to have enough ability to add value without excess regulation. Briefly, the anticipated revisions:

1. Clarify that fiduciary advice is individualized advice directed to specific parties
2. Clarify fee issues that allow for broker commissions without undue burden on plan participants
3. Clarify the rules about conflict of interest when providing investment advice

Plan sponsors can prepare for the revised fiduciary definition by reviewing plan documents and making sure that the information is included that may need attention:

1. Does the plan document clearly state investment advice relationships?
2. Are fees that are currently part of the retirement plan structure clearly delineated?
3. Are participants given choices that negate opportunities for conflict of interest?

When the new definition is announced, you will want to communicate with plan participants. Detail any impact the definition has on the structure of your plan.

For complete information about the proposed new definition of ‘fiduciary,’ see the DOL Web site.

You work hard to be compliant with all your fiduciary duties, so make sure that you don’t get tripped up with definitions of compensation for plan contributions. Here are types of errors to avoid:

• Commissions – Contributions to plans may be on ‘auto-pilot,’ pulling from a base salary. Make sure that commissions are included if such are required by the plan document.
• Contribution rate   The rate of contribution used in payroll should match the rate authorized by the participant.
• Cost-of-living increases – Make sure thatcontributions don’t exceed the maximum deductible amount for each year.

Take action:

1. Define all possibilities for compensation and amount of employer contribution in your plan document. Be sure to include timing issues such as how to handle compensation that is earned prior to entering the plan and compensation that occurs upon termination. (Examples include vacation and sick pay.)
2. Review your plan periodically, spot checking specific employee situations. You’ll make sure that your established system is working properly, and compensation-related benefits are consistent with the terms of your plan.

Compensation errors are quite common. They’re also easily correctable. However, if you don’t correct the error yourself and have and IRS audit, your plan can receive a significant financial penalty.

Please talk with your financial advisor or plan auditor to make sure that your plan is on track. As with all things IRS, the details and exceptions are numerous.

More than just a good idea, ERISA requires that all employee benefit plans have a fidelity bond. If it’s been awhile since you reviewed the amount of your fidelity bond, make a note to check it to be certain that you are adequately covered.

Who needs to be covered: All persons who handle funds or other property for an employee benefit plan, unless they are covered by an exemption.

How much coverage: Each plan official needs a bond that covers 10% of the amount handled, but not less than $1,000. The maximum bond amount needed is $500,000 per plan official, per plan. In the case of a plan that has employer securities, the maximum amount is $1 million per plan official.

Why bonds are needed: The purpose of the bond is to protect employee benefit plans from loss due to fraud or dishonesty. It’s unfortunate, but necessary.

How bonds are different from fiduciary liability insurance: A bond protects the plan from fraud or dishonesty. Liability insurance (not required, but a good idea) insures the plan from losses due to a breach of fiduciary responsibility – a less defined area.

As with many ERISA and DOL rules, there are numerous details and extenuating circumstances. For more information, see a list of 42 FAQs with answers.

A common plan mistake that I see is plan sponsors not monitoring forfeiture accounts. Forfeiture accounts occur when monies are set aside to match employee contributions to retirement plans, but the employee terminates prior to fully vesting. The ‘forfeited’ money is supposed to be distributed within the terms of the plan. Generally, the balance held in the forfeiture account should be fully allocated at least once a year. Therefore, the balance of forfeiture accounts should be ‘zero’ at least sometime during the year. The IRS states those forfeitures may be used to:

-         Pay for a plan’s administrative expenses and/or

-         Reduce employer contributions

Here’s what you can to do make certain that your company is in compliance:

-         Put a provision in the plan document to detail the handling of forfeited monies.

-         Monitor forfeiture suspense accounts to be sure that monies are not carried into a subsequent plan year.

If you have already made the error, it’s possible to self-correct the mistake without penalty within a two-year period. See the Employee Plans Compliance Resolution System (EPCRS) for information about a Self-Correction Program and Voluntary Correction Program.

The scrutiny on employee benefit plan administrators is intense, and plan management will continue to be an extremely important topic as baby boomers retire. A recent case involving plan participants for Kraft Foods Global Inc. creates a mandate for plan fiduciaries:

Plan managers must address the concerns of participants promptly and document all decisions to demonstrate that the plan is operating in the best interests of the participants.

While such a message seems obvious, day-to-day operations can interfere with fulfilling this duty. In the case of Kraft Foods, one of the investment selections was a company stock fund. The fund was ‘unitized’ with plan participants purchasing a ‘unit’ of the fund instead of a share of stock. The fund included cash, which did not increase in value at the same rate as the company shares of stock.  This situation is called ‘investment drag.’ And, while it may be appealing that specific transaction fees are eliminated, there are costs for managing the fund that are taken from the fund in general, and not from individual transactions. Because the fees associated are equally split regardless of number of units traded, a transactional drag’ occurs. In essence, plan participants pay the same fee whether they make one transaction or 10.

In hindsight, plan administrators were expected to address the ‘investment drag’ and ‘transactional drag.’ Because changes to the plan were discussed, but not implemented, the 7^th U.S. Circuit Court of Appeals found the administrators to be acting unreasonably in light of ERISA. Lawsuit situations will not just happen to Fortune 500 companies. All plan fiduciaries need to be vigilantly proactive.

Representatives from our firm recently spoke at a seminar for financial planners and one of the attendees had a question that can be important for plan sponsors: ‘What’s the difference between a trustee and a fiduciary?’  First, a trustee is always a fiduciary, but not all fiduciaries are trustees. Here’s a definition of each:

Trustees take in and manage funds, and make distributions to beneficiaries. Plan sponsors need to choose individual trustees, such as the owners or officers of the business. Another option is to hire an institutional trustee at a bank, insurance company or other financial institution.

Fiduciaries exercise discretionary authority or control over the management of the plan or its assets. They may also be people who are paid to give investment advice. Rather than a title, a person’s functionary relationship defines whether or not the person is a fiduciary. Attorneys, accountants, actuaries, brokers, and record-keepers are not fiduciaries unless they influence plan decisions or have responsibility for plan assets.

Many plan sponsors hire consultants to provide expert advice for Employee Benefit Plans. Because plan sponsors are ultimately responsible for all plan decisions, it’s important to fully understand a consultant’s qualifications. In addition, sponsors need to be aware of potential conflicts of interest. Here is a list of guidelines, summarized from an article by the Department of Labor.

1. Ask advisors if they are registered with the SEC or a state securities regulator, and have them provide appropriate disclosures.
2. Have advisors describe relationships with the money managers they use for making plan recommendations.
3. Find out if the consultant receives payments from money managers for recommendations.
4. Request written policies or procedures that address the issue of conflicts of interest when providing advice to clients.
5. Implement a system to track commissions and fees paid to ensure that over-payment does not occur.
6. Ask consultants to agree in writing that they are acting as a fiduciary for the designated plan.
7. Ask consultants about their arrangements with other clients to evaluate the objectivity of their recommendations.

Protecting yourself and your company will keep you in good standing with the Employee Retirement Income Security Act (ERISA) and the Department of Labor.