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Ten Ways to Limit Chances of a Department of Labor Inquiry

Paul McEwan
Sep 14, 2011

The Department of Labor (DOL) is responsible for enforcement of fiduciary, reporting and disclosure requirements for employee benefit plans. The DOL is in the process of increasing the number of investigators on staff; therefore, DOL investigations will be on the rise.

Here are ten ways to avoid a DOL investigation:

1) File your Form 5500 timely and accurately.

The filing deadline for Form 5500 is the last day of the seventh month following plan year end. An automatic extension of two and a half months is available if needed. Now that the filing process is electronic, the DOL knows immediately when your plan filing is tardy and they will send an inquiry quickly. By filing timely, you also avoid paying unnecessary penalties.

Starting in 2009, the Department of Labor beefed up the information required to be reported on Schedule C. Be sure your Form 5500 preparer is collecting and accurately reporting fee information on this form. The revised Schedule C is part of the process the Department of Labor (DOL) is implementing to increase the fee transparency of retirement plans. Take the time to read the information on Schedule C and ask questions of your providers if you think your fees appear unusual. The other fee transparency initiatives the DOL is working on relate to fee disclosure at the plan trustee level and the plan participant level. These are scheduled for implementation during 2012, so expect this information from your plan providers soon.

Be sure you are working with reputable plan providers if you rely on them to prepare the Form 5500 for your plan. Always review the prepared Form 5500 prior to filing for obvious errors or omissions.

2) Engage a quality CPA firm to perform your plan audit (if your plan requires an annual audit by an independent qualified public accountant).

Plans with more than 100 participants are required to attach audited plan financial statements to their Form 5500. The DOL tracks the quality of audits being done by CPA firms nationally. If your plan auditor performs poor quality audits, the DOL knows it and will be more likely to inquire about your plan. By utilizing a firm that is a member of the AICPA Employee Benefit Plan Audit Quality Center, you can increase your chances of working with a quality CPA firm. Click here to find a list of member firms. The Department of Labor works closely with the AICPA to educate plan auditors about the importance of quality plan audits. Unusually low audit fees are also a red flag that required plan audit procedures may not be getting done properly or at all.

3) Deposit participant contributions as soon as possible.

The issue of timely employee deposits is one of the DOL’s top initiatives.

DOL regulations require that participant contributions, including loan payments, be deposited into the plan’s trust on the earliest date the contributions can be reasonably segregated from the employer’s general assets. Given the fact that most companies have the ability to electronically submit funds, the “earliest date” is most often within a few days of pay dates. It is not recommended that an employer rely on the maximum time permitted under the regulations, which is the 15th business day of the following month. Late deposits are reported on the Form 5500 which can trigger communication from the DOL, and sometimes a DOL audit of the plan.

4) Make sure your plan has a proper fidelity bond.

An ERISA bond is a policy protecting plan assets. A company may often have a fiduciary policy or a policy protecting directors and officers, but not a true ERISA bond. Generally, the amount of the ERISA bond should be at least ten percent of the amount of funds handled, but in no event less than $1,000 or more than $500,000 for each plan covered. The Form 5500 does require that the plan indicate whether there is a bond and provide the amount of coverage. Indicating that there is no bond coverage could generate communication by the DOL. Plan sponsors should maintain a current policy and confirm that the coverage amount is adequate.

5) Promptly respond to participants’ inquiries and requests for information

Certain plan documents must be made available upon request from any participant or beneficiary. These documents include the summary plan description (SPD), latest Form 5500, any applicable collective bargaining agreements, the trust agreement and plan document. If a participant or beneficiary submits a written request, these documents must be provided to them within 30 days of the request.  If the information is not provided, there may be a penalty of up to $110 per day. A large number of DOL investigations are based on participant complaints. The best practice is to respond to participant inquiries as soon as possible.

6) Distribute regular, accurate participant statements

Plans must distribute regular benefit statements to participants and beneficiaries. For defined contribution plans, statements should be generated once each quarter if the plan allows participant investment direction, and once each year if it does not. For defined benefit plans, statements generally must be distributed at least once every three years. Participants may complain to the DOL if they feel they have difficulty obtaining statements.

7) Ensure that fees are reasonable and avoid paying expenses with plan assets.

The Form 5500 now requires plans to disclose fees paid to service providers from plan assets. Excessive plan fees are now another investigative issue for the DOL. It is acceptable for some fees to be paid from plan assets. Plan sponsors should be aware of the fees that are acceptable to be paid by plan assets and those that are not. A great way to determine reasonableness of plan fees is to perform an objective plan benchmark report. Quality benchmark reports are now available in the marketplace and are relatively inexpensive. Make sure that the firm you work with is independent of your plan for the most objective information. Keep the benchmark results in your fiduciary file as evidence of your due diligence related to fees. Consider perfoming a benchmark report every 3-5 years.

8) Respond promptly to DOL letters requesting information.

Form 5500 filings are a source for investigators to select plans for investigations. Red flags include plans with a large percentage of plan assets invested in real estate, limited partnerships, noncash contributions, loans reported in default, unreasonable low rates of investment return, an adverse accountant’s opinion and notes or disclaimers on the financial statements.

9) Utilize a qualified default investment arrangement (QDIA) in your plan if your plan allows participants to select their own investment allocation.

The DOL allows three types of investments to be used as a QDIA:

    1. A balanced mutual fund
    2. A target retirement date mutual fund, or
    3. A managed account.

The advantage of utilizing a QDIA as part of your 401k plan is that it limits the plan trustees’ liability when participants fail to affirmatively select their own investments for whatever reason. Without a QDIA, plan trustees are liable for the investment outcomes of participants that have not selected their own investments. There is no disadvantage to utilizing a QDIA.

10) Distribute required participant notices timely.

Over the last few years, the DOL has passed several laws requiring certain participant notices, such as blackout notices, safe harbor notices, automatic enrollment notices, etc. Check with your plan service providers to be sure which of these notices apply to your plan and that these notices are being provided timely and that the process is documented.

Be sure to contact your trusted tax advisor or retirement plan’s administrative firm whenever you receive communication from the DOL or have any questions about the regulations for any of the issues mentioned above.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 9/14/11.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

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