The IRS recently announced that employees will be able to contribute $17,000 to defined contribution plans for 2012, a $500 increase over the previous amount. And this week, the DOL announced a new regulation regarding investment advice that frees plan sponsors to be able to provide resources for quality investment advice with certain parameters.  Plans may offer third-party investment advice through:

-         Certified computer models for investment option comparisons

-         Investment advisors who are paid a level fee not dependent on the choice of investment

Plan sponsors will have the opportunity to select the investment advisor, but aren’t responsible or liable for the investment advice. If you use either of the investment advice options, you must disclose the advisor’s fee amount to participants and must submit to an annual audit.

While related to fiduciary responsibility, the latest rule adjustments for retirement plans are not the same as the anticipated new definition of fiduciary. The new definition is expected in early 2012.

For more information, see the DOL’s announcement.

With different types of distributions come different rules for withholding federal income tax. The IRS has clear, concise guidance on when and how much and to withhold from retirement plan distributions.

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.

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.

You may not think of your retirement plan as ‘illegal,’ however, the IRS views it that way if a plan is out of compliance. And, the IRS is getting better at identifying out-of-compliance employee benefit plans.  To be in compliance, a plan must:

-          Operate under the provisions of the plan document

-          Make timely contributions to the plan

-          Show proof of properly classified assets that satisfy liabilities

The Employee Plans function of the IRS uses a methodology to target plans for examinations. In an effort to protect the financial investments of plan participants, the Employee Plans function is able to predict emerging issues in plans that can put a plan in jeopardy of being able to fulfill its financial obligations. The methodology is partly based on knowledge of market segments that tend toward non-compliance. In addition, the IRS sources examinations from special projects, using information from changes to the Form 5500, legislative changes, and other available research. The Employee Plans function also selects plans that come from IRS-wide information sources about fraudulent tax schemes, and that come from referrals.  If the IRS finds a plan is currently or has the potential to be out of compliance, the IRS will work with plan administrators to correct the examination issues. For more information about the research from the Treasury Inspector General for Tax Administration, view the full report.

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.

Thankfully, there are tangible actions you can take to manage a retirement plan well and reduce or hopefully eliminate liability issues. Here are five things a plan sponsor or individual fiduciary can do: 

1. Create an Investment Policy Statement that describes your investment guidelines for selecting and monitoring funds. Keep the statement current and make it available for all plan participants.
2. Administer the plan according to the plan document, making timely contributions and monitoring performance. Make adjustments as needed.
3. Make it a priority to understand all contracts and fees. Negotiate fees to get the best rates possible. Fees are your greatest source of liability. Understand and account for all expenses.
4. Engage others in the plan process by forming a committee to meet with regularly and document the meeting decisions and discussions.
5. Seek advice from retirement plan specialists. Such specialists provide an un-biased third party view and can assist you with the need to be a prudent expert for your plan.

In addition, your plan auditor is a good source of information regarding the management of your specific plan. A good auditor adds value to the audit process that helps you be proactive about addressing potential issues.

Plan fiduciaries are increasingly accountable for the plans they manage, even to the point of personal liability. To help you understand how to minimize your personal and corporate risk, I first want to define ‘fiduciary.’ Plan sponsors are fiduciaries, but so are all parties who exercise discretion or control over a plan. ERISA (Employee Retirement Income Security Act) established standards of conduct for plan fiduciaries. According to the Department of Labor, retirement plan fiduciary responsibilities are to:

• Act solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them
• Carry out duties prudently
• Follow plan documents (unless inconsistent with ERISA)
• Diversify plan investments
• Pay only reasonable plan expenses

While liable for personal actions, fiduciaries may also be liable for the actions of co-fiduciaries. Monitoring of fees is a good example of areas where co-fiduciaries may be involved. And, many high profile lawsuits have occurred over the issue of fees paid to vendors for plan expenses.

To protect the financial interests of a company (and responsible individuals), fiduciaries must:

• Understand the scope of fiduciary responsibilities
• Identify and monitor the roles and responsibilities of all co-fiduciaries
• Follow the plan document
• Document all contracts, services, expenses, decisions
• Secure fiduciary insurance and ERISA bonds as needed

Next week, I’ll give you some specific ways that you can safeguard your plan and your position.