Doug Houser:
Not from Rea & Associates Studio, this is unsuitable on the road, a management and financial services podcast for entrepreneurs, tenured business leaders and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser, on this weekly podcast thought leaders and business professionals break down complicated and mundane topics and give you the tips and insight you actually need to grow as a leader and help your organization thrive. If you haven't already, hit the subscribe button so you don't miss future episodes. And if you want access to even more information, show notes and exclusive content, visit our website at www.reacpa.com/podcast and sign up for our weekly podcast newsletter.
Doug:
These days employers that know that even though they might offer their employees the opportunity to save for retirement by participating in their company sponsored retirement plan, most people aren't doing enough to get themselves over the finish line. As a result, government agencies continue to look closely at employee benefit plans to ensure that everything is being done to set more people up for success. Pam Dunlap, a Principal in our Cleveland office where we are today and director of Rea's Retirement Plan Audit Services Team is here to talk about this challenge and what companies can do to pass the Department of Labor's increasingly stringent inspection. Welcome to unsuitable, Pam.
Pam Dunlap:
Thanks Doug. This is great to be here.
Doug:
Good to have you here and thanks for taking time out of your busy schedule. It's obviously a busy time of the year, so really appreciate that.
Pam:
It sure. It's tax season, so.
Doug:
Yes, indeed. Talk a little bit about retirement planning for us. We see... We do so many retirement plan audits and help clients set up those retirement plans. What are some of the trends that you're seeing? What are some of the shortcomings that we can help folks think about and address?
Pam:
Yeah, I really love talking about a ERISA, crazy enough. But yeah, I love talking about it, and I love working in this space because it's a space where we get to serve our clients and those employers and plan sponsors, but we also in a way are serving all the participants as well. When we do an audit, our audit opinion is addressed to both the plan administrators and those plan participants. In my line of work, I kind of feel like it's fun to serve great clients, successful clients, but it's kind of like paying it forward too because we're paying... We're looking under the hood at what-
Doug:
Okay.
Pam:
... these plans are, how these plans are being operated for each of those participants that are in them as well.
Doug:
Okay.
Pam:
So it's kind of like paying it forward, it's fun that way.
Doug:
So you're in that sense you're looking out, you're an advocate for the employees as well in essence. Right?
Pam:
Correct, exactly.
Doug:
Yeah.
Pam:
And that's... You kind of brought it up a little bit about how the environments evolving now where back in the day the 401k section of the code was meant to be a supplement to pension benefits that were being offered. And I don't really think the intent was for the 401k retirement plan to become the mainstream way of folks saving for their retirement.
Doug:
Great point.
Pam:
And so now that that's happening, employers are realizing, Oh, this is my employee's way of saving for that wonderful day when they run off into the sunset and retire. And the DOL is realizing that too, and the IRS as well. And they're saying, "Gosh, there's 131 million people that are participating in whether it's a pension or a health and welfare or a 401k plan, and there's $8 trillion of assets out there that we-
Doug:
Wow.
Pam:
... us public accounting firm auditors that we're auditing."
Doug:
Yeah.
Pam:
8 trillion is a big number. It's gotten everyone's attention and the DOL and the IRS are going to continue to pay attention to what folks are doing in that space.
Doug:
Yeah.
Pam:
And how well they're managing it and how well they're utilizing outside providers to help them manage it.
Doug:
Okay. That's a fantastic point. As you said, the original intention maybe wasn't what it was or what it has evolved to today, so we have to adapt to that. I think I saw a statistic, something about the average American has less than $10,000 in their 401k. Is that kind of accurate or what do you see?
Pam:
That particular statistic, I am not well versed in whether that's accurate or not.
Doug:
Yeah.
Pam:
I know that we, in our space when we're auditing plans, typically see folks have more than that, but we are auditing larger plans that are in play-
Doug:
Gotcha.
Pam:
... because we're working with clients. You don't trip an audit requirement until you have at least a 100 eligible participants in a plan.
Doug:
Mm-hmm (affirmative).
Pam:
So we're dealing with larger employers with larger numbers of employees. And as a result, folks have a little bit more in there because they'd been at the companies for awhile.
Doug:
But, regardless how to... One of the things I'm sure that we try to help employers with is to increase that participation, right? What is some of that messaging? What are some of the things that we do to help the employers because they want to help their employees, right? It makes the employees happy. They can retain them longer, better benefits, all those types of things.
Pam:
Right. Well that's definitely one of the things that we bring to light. One of the value adds I feel that comes about from a quality audit or a quality advisor are helping employers understand what some of those hot buttons are that the DOL is looking at. And not only that, but helping them with best practices for what they should be doing in their plans. And one of the best practices that we're seeing right now is an auto-enrollment feature-
Doug:
Okay.
Pam:
... where employers are really jumping on board with requiring folks to be a part of a plan immediately upon meeting the eligibility requirement.
Doug:
Okay.
Pam:
Once they've met that requirement, the employee is automatically put in a plan, usually at around a 3% deferral rate. And then sometimes they're subject to an automatic deferral rate increase each year.
Doug:
Great, yeah.
Pam:
And that kind of gets folks into the mindset of this is a good thing to be saving and also help some of their compliance testing requirements as well to have more folks involved.
Doug:
Okay.
Pam:
That's definitely one of the things that we we're seeing catching on more and more right now is this auto-enrollment feature that employers are implementing in their plans.
Doug:
That's great. I think that's a great idea because then his employees hopefully get wage increases and things like that and the step up with the percentage goes along at the same time. It's sort of like hand in hand, they don't necessarily maybe feel it as much, but yet they're really increasing what they're saving for retirement.
Pam:
You are exactly on point.
Doug:
Yeah.
Pam:
And that's why it works so well is because as you get that payroll increase, it doesn't affect your take home as much then when the increase in the rate that you're deferring aligns right with your increase in pay, they recommend that folks increase their deferral percentages when they get a rate increase. It's a really great...
Doug:
It's a great tool. Yeah.
Pam:
Exactly.
Doug:
Talk to me a little bit about some of the compliance. I know I've had some of our folks help set up Safe Harbor plans for some of our clients. Can you speak to that a little bit in terms of what that might do for a client potentially?
Pam:
Sure. I guess where I would go with the Safe Harbor plan and just this concept of having an employer match that's occurring in a plan.
Doug:
Okay.
Pam:
That's becoming a differentiator for the new generation that's in our economy.
Doug:
Yeah.
Pam:
Folks are looking to see that employers are offering a match when they defer into their plans. Back in 2008, 2009 people pulled those back-
Doug:
Yeah.
Pam:
... and said we need cost cutting measures in place. The Safe Harbor along with any employer discretionary match allows the opportunity for an employee to have their deferrals matched by an employer contribution.
Doug:
Right.
Pam:
And I really think our employers need to think about what are they offering in that regard because this new generation, they value things differently-
Doug:
Sure.
Pam:
... than others in the past. And that matching attribute, that Safe Harbor match or another type of discretionary match that an employer has is become increasingly important for employers to offer.
Doug:
Absolutely. It's funny you mentioned that on our podcast last week with Cindy Kula and Aaron Klein, we talked about generational differences and just thinking a little bit differently and having that different balance and what they want from an employer. That's very apt that you bring that up. Shameless plug, check out last week's podcast too. But anyway, getting back to the compliance, do you see the Department of Labor focusing on some different things over the last couple of years? What are some trends that we've seen there or likely to see going forward in your opinion?
Pam:
Yeah, we see lots of different trends that evolve, but most importantly, their number one item that they focus on is whether or not an employer is getting their employee deferrals into the plan on time.
Doug:
Okay.
Pam:
It's number one, there's been a lot of chatter out there about them looking into it. They calculate the number of days it takes an employer to get money from the employee's paycheck into the trust itself.
Doug:
Okay.
Pam:
And that should be... If an employer isn't monitoring that, they definitely should be. It's the number one thing they look at when they come in to do an audit. And nine times out of 10 if you don't have someone kind of watching that process, they can get into a situation where they could have fines and penalties associated with it. And I think that's one point that I wanted to make is it's very important that I think that in the past there was a mindset that employers could hire outside third parties to kind of manage their plan and kind of just like this coronavirus situation where we thought before This was some idle chatter, some idle knives out there. It's definitely the landscape's changed.
Doug:
Yeah.
Pam:
You have to be managing or watching and monitoring that your payroll provider, even though it automatically sends the money to the custodian, you have to make sure that that's happening at the right amount and in a timely way.
Doug:
Okay.
Pam:
And I think in the past some folks have said, "Oh, I've got some other people that are handling that for me and I don't really need to worry about it." That has evolved to their number one finding on an audit.
Doug:
Interesting.
Pam:
Yeah. If there's one takeaway from this podcast for plan sponsors that are listening out there, it's take the time to make sure you're looking and monitoring what's happening in your plan in that regard.
Doug:
When you about that maybe not happening, is in your situation or in your experience, the biggest problems, are they with payroll providers that aren't doing that or who... Where's the gap there in your opinion? Do you see all kinds of different things?
Pam:
There's a lot of reasons. A manual check causes a reason a lot of times, a change in a deferral rate that's not processed right can cause a problem.
Doug:
Okay.
Pam:
There's a litany of reasons as to why something might not occur right.
Doug:
Sure.
Pam:
It could be a file didn't get sent over with the right encryption or it could be so many different reasons, which is why if you don't have someone checking that we've had situations where someone thought it got sent over and it got processed and if you don't have those quality third party folks helping you in the process, if they aren't notifying you, it really does fall on the plan sponsor to be responsible for that. And the DOL and the IRS will tell you that.
Doug:
Yeah.
Pam:
A lot of folks will say, "Oh no, I know I had that organized and it was integrated and I outsourced that to folks to manage that for me." But I can tell you when they come into audit you they were going to hold you responsible for making sure the money's get in there.
Doug:
As the plan sponsor, the company, the employer, what type of best practices should they have in place to make sure they're taking care of these things? Obviously they have a great responsibility to do this on behalf of their employees. What are some best practices there?
Pam:
Yeah, well we work with our successful clients to kind of set up some processes so that they are performing the right control activities to make sure that's happening.
Doug:
Okay.
Pam:
Definitely at a minimum folks should be looking at their statements they're getting from their custodian and then looking at the monies that are reported in those statements and looking at whether or not they look reasonable, but even needs to be drilled down a layer below that and-
Doug:
Okay.
Pam:
... making sure that the folks that are remitting the monies are watching what's transpiring. That's one of the things that folks should be looking for their audit advisors to help them with is to say, "How can I set this up so that I can make sure I'm watching it and not getting into harm's way?" And that's one nice thing we try to do is kind of give our clients a solution to try to manage that.
Doug:
Yeah, I mean I think that's hugely important because it is potentially a huge risk for them if they're not doing things properly. Do you see any type of increase in frequency of Department of Labor audits or anything like that? You mentioned, obviously a trend in terms of what they're looking at. How about frequency at all? Has that changed much in your experience?
Pam:
Yes. In the last four years, they've definitely increased the number that they're looking at. They've not only-
Doug:
Interesting.
Pam:
... they've not only changed the number that they're looking at the employers, so at the plan sponsor level-
Doug:
Yeah.
Pam:
... but they're also looking at the quality of the audits that folks are having done.
Doug:
Really?
Pam:
Back in 2015 they did a review of the audits and found that there were a number that were deficient.
Doug:
Interesting, okay.
Pam:
And when they found that some of these sole proprietors that maybe did a great job with taxes and did a great job on maybe their corporate work, when they started venturing into a plan audit space where they weren't well versed in ERISA and they were still trying to issue these audit reports, they found that they were not qualified audits, they weren't complete audits.
Doug:
Gotcha.
Pam:
There was a whole conversation that started around you need to make sure plan sponsor that when you're hiring your auditor that they are a competent auditor. Make sure they have a pedigree in understanding of ERISA. And make sure that they have an experience of working in more than one plan-
Doug:
Yeah.
Pam:
... not just this one client that's a one off.
Doug:
Right.
Pam:
And they found that most of the ones that weren't qualified were folks that were doing like five or less audits. I'm not saying that everyone out there doing five or less audits isn't doing a good audit, definitely they found a consistency in folks that were doing low numbers that they weren't doing an adequate job. Now that they found that and that they found that some of these operations of plans weren't... The operations and the monitoring that plan sponsors were doing wasn't adequate that they've definitely started looking more and said they're not going to stop. They're not going to stop their quest to make sure that these 130... Excuse me, this 131 million participants-
Doug:
Sure.
Pam:
... that are in these aren't being harmed in some respects.
Doug:
Oh and again from a political perspective too, I mean it's you're advocating and looking out for employees and that no matter which party or how you fall politically, that's always going to be something that's emphasized and pushed. It's likely, certainly not to decrease at all.
Pam:
Right.
Doug:
But I think that's a great point you make about qualifications and expertise because I'm certainly not capable of doing a pension audit. And used to looking at contractors and we see that often where you've got somebody that maybe is good at one thing, just because they're a CPA doesn't mean they're qualified. Talk about some of the continuing ed and the training and the things that you and your team go through to keep up to date on this stuff.
Pam:
One of are the groups that a lot of firms belong to, including ours is the AICPAs Employee Benefit Audit Quality Center.
Doug:
Okay.
Pam:
I would highly recommend plan sponsors make sure that folks are members of that quality center because that quality center helps put out tons of information about how to do quality audits. They put out tons of information about how plan sponsors can monitor their operations of their plans and key things that folks should look at in terms of-
Doug:
Okay.
Pam:
... compliance and new rules and regs that are coming out.
Doug:
Okay.
Pam:
They're at the forefront of describing what those are and they really do keep an audit firm very informed of what all of those nuances are in their space.
Doug:
Sure.
Pam:
And not only that, but provide... They provide periodicals that you can pass along to clients to say-
Doug:
Okay.
Pam:
... "Okay, here's how you can understand how to do this or that, or here's some best practice information." To just be a part of that is of a big help to any firm that would be in this space doing audits, being a member of that.
Doug:
Sure.
Pam:
Obviously there's with anything anymore, we're all becoming specialists in our field.
Doug:
Right.
Pam:
There's a lot of great training out there that we make sure we attend as well as we pass that down among all levels of individuals working in this space, in our firm in particular-
Doug:
Yeah.
Pam:
... it's important to have some type of robust internal training program because you can send one or two people away for a conference, but if it's not shared you're missing out on that value.
Doug:
Right.
Pam:
It's important to do that.
Doug:
Personally, I think that's where you do a great job of having taken that leadership of that segment and communicating with the team and making sure that they are up to date. It's all transparent. This is what we should all be doing. It's not a different across the firm, it's Hey these are best practices, this is how we need to do things. I applaud you for that. Last topic, talk a little bit... We see so much M&A activity going on, companies that are acquiring or as the boomer generation ages transitioning out and so businesses are being moved or combined in some fashion. What type of risks do you see with plans that all of a sudden are a part of that transaction?
Pam:
Yeah, that's a good question. We see folks trying to work through the thought process of, okay, I'm acquiring a company and they do have a retirement plan and what do I want to do with that plan as I kind of merge in that company into my entity. There's a number of different considerations about what you do there. Are you going to merge that existing plan into your plan? Are you going to terminate that other plan and what are you going to do and how you're going to do that and what does it mean to folks? And in terms of working through that thought process and that due diligence and understanding what types of benefits are offered from the acquired entity side of things-
Doug:
Sure.
Pam:
... you have to make sure in that process that you're considering, am I harming people, are they less of benefit as I move them into this new company? And can kind of help walk folks through what does it mean if I decide to go down this path or the other path-
Doug:
Right.
Pam:
... if I decide to merge, what does that mean? And if I decide to terminate, what does that mean and kind of help them frame their thoughts around what would be better for them in their situation
Doug:
Because those risks can be on identified I can imagine if you don't really think about that or is it sort of an afterthought like, Oh our operation, these two companies would fit well together, but that can affect the purchase price or any of those things. Right?
Pam:
Right. And when you're going through M&A you're always trying to make sure you are managing your risk and as you think through the process in one of those respects, you can bring over any skeleton in the closet that was there.
Doug:
Sure.
Pam:
You want to work through if you're okay in that mindset of bringing that over or if you want to kind of shut that door and kind of press a restart button as folks are folded in or blended into your new company.
Doug:
As you said, just make sure you're talking to the expert advisor like yourself and understand the risks and know what is in front of you and make the best decision for your company. That's great insight. I really appreciate it, Pam. I've learned a lot today. It felt like I knew nothing about this topic coming in and now I know enough to be dangerous and certainly to call you if there are any questions. Really appreciate that. I think that's great in terms of the position you take and being an advocate for not just our client themselves, but the employees too. That's just a great outlook, so really appreciate it.
Pam:
Thanks Doug. This was fun.
Doug:
If you want more business tips and insight or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast and while you're there, sign up for our weekly podcast newsletter for exclusive content and show notes. Thanks for listening to this week show. Be sure to subscribe to unsuitable on Apple podcasts or wherever you listening to us right now, including YouTube. I'm Doug Houser. Join us next week for another unsuitable interview from an industry professional.
Disclaimer:
The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only, and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.
