One of the most significant errors in retirement plans is the calculation of compensation for plan contributions. The IRS views such errors as very serious, with consequences that can lead to operational failures and ultimately, disqualified status. Here are examples of compensation errors:

-          Contributions to the plan by the employer on base compensation only. If a plan document states that profit-sharing contributions are to be calculated for base compensation plus commission, be sure that contributions are also made for commissions paid to the employee.

-          Exclusion of overtime or other ‘extra’ pay from definition of compensation. If overtime or other pay is excluded, then the contribution rate becomes unequal for highly-compensated vs. non-highly-compensated employees.

-          Using a higher amount of compensation than allowed by the IRS Code §404. Going above the approved IRS amount may result in a nondeductible contribution and the employer owing additional tax, including excise tax.

-          Failure to use the IRS’ statutory definition of compensation. The IRS specifies limits and minimums.

Here are tips from the IRS to avoid compensation-related failures:

1. Review your plan document’s definitions of compensation for each plan purpose.
2. Use the statutory definition of compensation when required.
3. Transmit accurate compensation data for each employee to your payroll processor and plan administrator.
4. Consider amending your plan to use one definition of compensation for all plan purposes.
5. Periodically review your plan for errors and fix them as quickly as possible using IRS correction programs.

Bloggers and financial planning professionals are talking about the DOL’s upcoming requirement to disclose details about administrative fees for 401(k) plans. July 1 is the date that sets all of the wheels in motion regarding fee disclosures. Right now, you can plan ahead and be ready, and make any adjustments you feel are needed for your plan. The DOL has a worksheet that takes you through a series of steps to determine the fees you pay. Using this worksheet will give you clarity about your fees and ample time to prepare how to address the fees and present them to current employees and other plan participants. Here are the key dates to remember:

July 1 – Plan administrators and mutual funds must disclose details of administrative fees (direct and indirect compensation) in 401(k) plans.

August 30 – Plan administrators must furnish plan participants with a copy of the fees by this date.

November 14 – Date by which fees and expenses must appear on the quarterly statement for fees incurred from July to September, 2012.

With the information you uncover about your fees, you may want to consider benchmarking your plan against other plans with similar number of participants and assets. Having benchmark information will also help your justification of fees with employees. Remember that many employees are unaware of fees and will require justification because the fees affect their ultimate savings.

The formal name for setting auditor expectations is ‘written representations.’ Without a document of representations, the auditor is limited in his or her ability to provide a thorough opinion of the plan. The plan managers who are responsible for financial statements need to prepare a complete document for the auditor that includes the following:

-         Financial records and related transaction information

-         Minutes of meetings related to the plan such as plan committees, trustees or directors

-         Communications from regulatory agencies

In addition, the document must also include the following eight disclosures:

1. Acknowledgement of the fair representation of the financial statements of net assets available for plan benefits and  statement of benefit obligations
2. Statement that any uncorrected misstatements are immaterial to the financial statements as a whole
3. Internal control responsibility and procedures to prevent and detect fraud
4. Knowledge of any suspected fraud by management, employees former employees, regulators or others
5. Knowledge of violations or possible violations of regulations or unasserted claims
6. Intentions for the plan that may affect the classification of assets or liabilities
7. Verbal or written guarantees or gain/loss contingencies that affect the plan’s liabilities
8. Documentation of assets that are pledged as collateral

Your auditor will also want to know answers to these five questions: Read the rest of this entry »

401(k) plans require much maintenance to meet fiduciary requirements. There are many mistakes that can creep in over time that put you out of compliance. Here’s a list of potholes that can wreck your plan with the IRS:

-         Not updating your plan to reflect current laws

-         Not operating the plan in accordance with the plan document

-         Incorrect definitions of compensation for deferrals and allocations

-         Lack of consistency with employer matching contributions

-         Failing the 401(k) ADP and ACP nondiscrimination tests

-         Excluding eligible employees

-         Not making timely deposits of employee elective deferrals

-         Incorrectly administering participant loans or hardship distributions

-         Not making required minimum contributions

-         Delaying filing the Form 5500-series return

-         Not distributing a Summary Annual Report to all plan participants

Instead of losing sleep over the problems that come with non-compliance, the IRS provides a simple to understand 401(k) plan fix-it guide. The guide includes how to find, fix and avoid mistakes. Regular review of this list and making note of your compliance actions can save you time and work when it’s time for an audit.

Your 401(k) auditor has two essential and one optional step to take with regard to internal control deficiency findings. Before you hire your auditor, ask what you can expect with regard to communication and recommendations. By including your expectations in your engagement letter, you’ll get a better quality audit and can get information that will help you.

Two essential steps for your auditor

1. Evaluate the severity of deficiencies – Your auditor will determine if an individual or combination of deficiencies are material weaknesses or significant deficiencies. The measure used to determine severity is the:

• Magnitude of the potential misstatement
• Degree of possibility that the plan’s controls will fail to prevent, or detect and correct a misstatement of an account balance or disclosure.

2. Communicate the deficiencies in writing – Your auditor has no more than 60 days following the financial statement issuance date to communicate the deficiencies to you. For plans that file a Form 11-K with the SEC, the deadline is to communicate within 45 days. If no deficiencies are found, the auditor must also communicate a lack of deficiencies.

Note: Auditors are required to put the same deficiencies in writing repeatedly until the deficiency is corrected. And, the deficiencies found must be put in writing even if they were corrected after a verbal notice of the deficiency.

One optional step for your auditor

Recommend steps to take to improve internal controls – To me, this step separates an adequate auditor from a good auditor. Your organization can gain valuable insight from the recommendations prepared by your auditor. The recommendations give you fiduciary guidance that you can use to evaluate the costs and benefits for revising internal controls.

Such focused attention on internal controls gives plan fiduciaries a confirmation of governance, which is justification of a well-managed plan.

One of the most significant points of your benefit plan audit is determining the strength of internal controls with regard to reliable financial reporting. Here is a description of the three types of deficiencies that you want to avoid:

1. Material weakness – A deficiency, or combination of deficiencies in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.
2. Significant deficiency – A deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
3. Deficiencies in internal control – Exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.

Because internal controls are critical to good fiduciary management, I want to make sure that you have examples of issues that could cause a problem for you. Here are types of circumstances that may be material weaknesses or significant deficiencies: Read the rest of this entry »

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:

Read the rest of this entry »

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.