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.

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.

While we wait for the official DOL ruling about plan fees, here’s a Wall Street Journal article that offers some explanation and perspective.

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.

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.

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.

It was discouraging to see the article in Forbes last week (August 16, 2011) titled, “Why 401(k) plans are doomed from the start.” From an auditor’s point of view, looking at hundreds of 401(k) plans, I think a better title would be, “The challenges facing 401(k) plans.” While responsibility lies in both courts, the participant and the sponsor, I will address a few of the issues that are put upon the sponsor to support my readers in optimal plan management.

1. Document the reasons for plan investment decisions. Financial brokers can bring you information that is helpful in making investment decisions. That doesn’t mean that you are relying on them as fiduciaries or that there is anything improper about the relationship. However, you need to protect yourself with having a range of resources and document all plan decisions.  Preferably, have a plan committee that includes non-biased fiduciaries.
2. Define your plan fiduciaries. Make sure that your plan document includes the credentials and relationships of all of the fiduciaries with input into your plan. See my previous post, Trustees vs. Fiduciaries, for more information.
3. Understand the relationship between plan costs and associated fees. As we have said before, much scrutiny is applied to plan fees by both disgruntled participants and the DOL. Be fully aware of the fees you pay and document committee decisions.
4. Keep your Investment Policy Statement up to date. The issues discussed above relate to your current Investment Policy Statement. Your Investment Policy Statement provides validation for the integrity of your decisions. It is also an important element to demonstrate compliance to ERISA and DOL rules and regulations.
5. Use your audit as a tool to improve your plan. Companies with 100 or more participants are required by law to have an annual audit. Your auditor can be a valuable resource for suggestions to improve operations and protect yourself from liability.

It’s time to start thinking ‘audit’ for your 401(k) plan. Asking yourself a list of questions will help you prepare and can even save you money in audit fees. Answering these questions provided by the IRS and taking action can reduce the amount of time it takes for an auditor to complete a review. Here you go –

1)      Has your plan document been updated within the past few years?

At the minimum, you need to keep your plan updated to reflect current law changes. In addition, the following documents need to be kept with the plan: 

• Original plan document which provides in-depth details of how the plan must operate.
• All subsequent amendments or restatements to the plan document.
• All adoption agreements provided by a vendor that allows you to choose plan design options. While not the complete plan document, the adoption agreement includes eligibility requirements, the types and amounts of contributions allowed, the allocation method for employer contributions, the vesting schedule applicable to employer contributions and the distribution options.
• Any opinion letter or advisory letter issued by the IRS.
• Any determination letter issued by the IRS.
• Board of director’s resolutions and minutes, or similar records related to the plan.

 2)      Are the plan’s operations based on the terms of the plan document?

It seems like the operations would naturally be based on the terms. However, it’s easy to drift from the terms of the plan document. One of the most significant areas of drift is the definition of compensation. Make sure that all actions taken by the plan are and have been communicated to employees.

3)      Is the plan’s definition of compensation for all deferrals and allocations used correctly?

A plan’s definition of compensation must satisfy the rules for determining the amount of contributions. This can get tricky when considering deferrals and different types of allocations, such as bonuses. For 2010, the amount of compensation taken into account under the plan cannot exceed $245,000.

If you need more detail, visit http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.

Recently, the Employee Benefits Security Administration announced indictments against two separate employee benefit plan employees for embezzlement. In one case, the TPA will spend prison time and make financial restitution of over $700,000 for making a false statement on the Form 5500. In the other case, the company vice president will have five years’ probation and must restore more than $186,000 to the people from whom he diverted funds.

These cases bring home the extreme importance of making sure that all parties involved with your employee benefit plan have the highest integrity with fiduciary responsibility. The DOL is also getting involved with a broader proposed definition of ‘fiduciary’ aimed at exposing undisclosed fees, misrepresentation of compensation agreements and biased values of plan investments. The proposed definition of a fiduciary under ERISA includes any person that gives advice, appraisals or recommendations regarding securities or property in the plan. In addition, if the person acknowledges themselves as a fiduciary or has any authority or control over the administration of the plan, meets the basics of the Five Part Test (even for short term advice) or receives a fee for advice, then they may be deemed a fiduciary and held accountable in their role in the plan.

A person would not be considered a fiduciary if he or she is only providing general information or if that the person discloses that they are providing a platform of securities from which a plan fiduciary may select and designate investment alternatives. Selling securities or other property to a plan does not make a person a fiduciary.

A public hearing in Washington, D.C. will be held on March 1 (and March 2, 2011 if needed) to discuss the new definition. For more information see the DOL news release: http://www.dol.gov/ebsa/newsroom/2010/ebsa122210.html

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