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.

Once you make an amendment to your plan, how and when you communicate with plan participants is an important ERISA requirement. A case this fall, Helton v. ATT, Inc. (Sept. 16, 2011), points to four important lessons in communication:

1. Answer plan participant questions in a timely and concrete manner

Your communication with plan participants is best put in writing whenever possible. Documenting answers to questions that come from plan participants about their
specific situation keeps everyone on the same page.

2. Prepare and distribute a Summary of Material Modifications (SMM) or Summary Plan Description (SPD)

You technically have 210 days after the plan year in which the changes are adopted to communicate changes. However, you’re better off preparing and distributing
materials as soon as possible to make sure that those affected by the changes can act accordingly. And, the task is complete – it won’t be overlooked with the passing of time.

3. Keep records of how and to whom SMM or SPD notices were sent.

If it’s possible for plan participants to somehow miss a piece of communication about plan changes, you need documentation to prove that the proper notice was sent in the time required by ERISA. Documentation may be as simple as a mailing list of recipients.

4. Remember that all plan participants and surviving beneficiaries need a notice, not just current employees.

This communication tip may seem obvious, but unfortunately, it’s not always followed.

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.

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.

A recent Supreme Court decision is a stark reminder for plan sponsors
to double check the consistency of Summary Plan Documents with the current plan
document. In CIGNA Corp. vs. Amara, the Court held that companies can be
responsible for ‘equitable relief’ that occurred when CIGNA changed the plan
from a defined benefit pension plan to a cash balance plan. Regardless of the
circumstances, court decisions are weighing in on the side of the plan
participants in stating that detrimental reliance does not always need to be
established. Companies are exposed to ERISA class action suits, and individuals
are not responsible for citing specific harm.

What you can and need to do: Review your Summary Plan Documents (SPDs)
in light of your plan provisions. Seek the advice of an attorney if you think
you need to add provisions to the SPD or create a more detailed summary in your
plan provision statement. As a precaution, ask your auditor if he/she thinks
that you need additional details to protect your company and plan participants
from discrepancies in documentation.

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

Read here:  http://bit.ly/6TH9Le “The Rap on Wrap Plan Documents”