Dave Cain: Welcome to unsuitable on Rea Radio, the award winning financial services and business advisory podcast that challenges your old school business practices, and the traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help enhance your company’s growth. I’m your host, Dave Cain.
Business owners are no strangers to regulatory changes, but sometimes the logistics behind changes can be difficult to comprehend. This is the case for some of the new regulations coming down the pike from the Department of Labor. Today’s guest is here to talk about the big three up and coming DOL regulations that will impact business owners. Kim Veal, a supervisor on Rea’s Benefit Plan Audit team, is here to explain why new regulations will change the way the DOL or the Department of Labor looks at fiduciaries, participants, and plan audits. Welcome to Unsuitable, Kim!
Kim Veal: Thanks for having me!
Dave: This is your first time on the podcast.
Kim: It is, it’s a little scary.
Dave: Good. I understand, as we’ll talk to our audience here, let them know a little bit inside Kim Veal. You’re a senior accountant with a specialty in auditing.
Kim: I’m a supervisor, but yes I do have a specialty in accounting.
Dave: Well supervisor is way more important-
Kim: Way more important.
Dave: And, you’re a graduate of Ohio Northern.
Kim: Yes.
Dave: We got quite a few polar bears that listen to the podcast. Now one of the things that I’ve noticed that you’re famous around the firm with your clients, is you’re an auditor with a personality.
Kim: Apparently, apparently that’s what everybody is saying!
Dave: And apparently auditors have a reputation or stereotype of not having a personality.
Kim: Yeah, we don’t believe in that.
Dave: We don’t believe in that?
Kim: No.
Dave: So I also want to talk to you about, you’re very creative, and again I think sometimes auditors get a little bit shorted when it comes to creativity. But I recall back in October at the Rea Halloween party-
Kim: Oh man.
Dave: You had this really creative Halloween costume. You wanna share that with our listening audience?
Kim: I did have a very creative Halloween costume. I used my access to the internet and looked up creative costumes, and found one that I enjoyed. It had the official title of Fifty Shades of Grey, but it was not x-rated, it was some paint samples that were all in grey tones that decorated, I made a skirt out of them, and yeah. I didn’t win, but …
Dave: People bought you a lot of drinks!
Kim: Rea bought me a lot of drinks.
Dave: So anyway, let’s talk about the Department of Labor, and some of the changes that are about to happen. And before we do that, as you and I are both participants, as employees in a 401(k), a pension plan. And so sometimes we forget that the Department of Labor is protecting us as employees in those plans.
Kim: Yes.
Dave: So as employees of any plan, they should be paying attention, or at least have knowledge that the DOL is making some changes.
Kim: Yeah it’s very important for everybody, from employers who sponsor these plans to employees who are participating in them, to know what’s coming down the pipeline, because it can affect what happens with your plan, how much their expenses are and everything.
Dave: So it is important at all levels. We usually think these will impact the employer, which we will talk about that. But it’s employees or anybody who wants to start a plan, or fiduciaries of a plan.
Kim: So especially when it comes to employees, it can be impacted by, per se, the fees that get charged. If they’re paid by the plan, that’s coming out of your account, so you’re gonna wanna be watching for what exactly is happening, ’cause that could increase or decrease the fees that hit your account.
Dave: You know, as an auditor, I know you do your share of retirement plan audits as well as other audits, have you run across a fraud situation yet?
Kim: I have not, thankfully. The clients that I’ve gotten the chance to work with are pretty active in guarding their plans, so that’s always a benefit that when we work with those types of clients that we’re not too concerned that it’ll happen. We’re always looking, because that’s obviously important, but I have not.
Dave: But you also look as an auditor, you look for maybe holes in the system, or problems within their internal control system that could lead to fraud.
Kim: Yes. We are required to at least look at their internal controls. We might not fully test them, but if there’s a hole that we find in their internal controls, we’re gonna tell them about it. And we use lots of staff across the board, if it’s not me reviewing them, we have someone from our pension admin departments will take a look at them just to see what type of recommendations we could give.
Dave: You know on our, on several versions of the podcast, we’ve had guests from our business evaluation team, Tim McDaniel, and Mary Beth Koester, and they talked to us about one of the problems that decreases the value in a business is risk. I think there’s probably a risk here if an employer is not following these DOL rules. A huge risk, maybe a huge liability.
Kim: Yes.
Dave: So this goes far greater than just covering the DOL rules and checking the box and filing a tax return. It can have an indirect impact on the value of an individual’s business.
Kim: Yes, absolutely. ‘Cause I mean we even have some plans that are in fact employee stock ownership plans, so they’re buying stock in a company, and if that company isn’t, their management isn’t overseeing the plan, well what if they face fees? Well that could drop the value of their company based on how much they’ve had to pay out in DOL, IRS, regulatory fees, all of that, which will drop the value of just the plan itself, and it’s kinda like a circle.
Dave: Right, right. Let’s talk about the three up and coming regulations from the Department of Labor.
Kim: I call them the big three, only because the financial accounting standards board has their current big three that have to do with some of the recognition policies for three different big areas. So I kind of called these the big three in a similar manner. So the first has to do with fiduciary responsibilities. The DOL has issued final regulations regarding investment advisors, and whether or not they really apply as fiduciaries. And so those advisors previously weren’t directly pulled in like plan sponsors are, or management, but they are now considered, if they’re receiving money to offer financial advice, they have to give recommendations that are in the best interest of the plan participants. So that’s a big change that was delayed originally, but it actually takes effect tomorrow. So that one is major. It starts tomorrow.
Dave: Thursday!
Kim: Thursday!
Dave: Friday!
Kim: Friday! June 9th.
Dave: I’m confused on the day of the week. But let’s continue.
Kim: The second has to do with revamping of the 5500 filing itself, which is what every plan, if it meets certain base requirements, has to file with the IRS on an annual basis. They have expanded the potential questions that are gonna be on there, the amount of data you have to provide, and specifically they’ve changed the definition of what a participant is, which is one of the major impacts.
Dave: So the 5500, you referred to that form. That’s the actual tax form, or tax filing for the retirement plan, or benefit plan.
Kim: Yeah, it’s their annual tax filing.
Dave: So just like my corporate 1120, or 1065, or partnership return, I have to file a 5500.
Kim: Yes. The only difference is there’s no tax due, it’s an informational return.
Dave: What happens if I don’t file that return? Or am I late? Uh oh.
Kim: If you’re late, that’s bad, and you will face some significant penalties and fees, just like if you’re an individual and don’t do it. So yeah, they still monitor, even if they’re not looking to collect, they use a lot of that information and make it public, because of how important these plans are to people and the employees of those companies.
And then the third is actually officially not issued by the DOL, it’s by the American Institute of Certified Public Accountants, and their auditing standards board, in conjunction with all the changes that are coming from the Department of Labor. It is an update on basically auditing these types of plans, and revamping all of that, and the report that might have to be attached, and the amount of work that might have to go into these audits. So that’s kind of where that’s going.
Dave: So to summarize, the three changes that we just touched on are the new fiduciary rules, those are big and very important to the plan sponsors and you cannot ignore them. And I can’t delegate that to anybody.
Kim: No, no delegation allowed.
Dave: And the changes in the tax return, which is a significant change. And a new exposure draft regarding auditing standards.
Kim: Yes.
Dave: Now I know the DOL has come down pretty hard on the CPA profession for not following these rules. And I think what they’re trying to do is go after CPA firms who maybe audit one, two, or three plans in a year?
Kim: Yes. Those are the dabblers of the world, is what they call them.
Dave: The dabblers.
Kim: The dabblers. They only do one or two, and that’s actually where some of the 5500 changes have come, and why they want to change the definition for participant. They have a lot of smaller employers who don’t have a large amount of participation in the plan, so their eligible employee count goes over, but their actual participant count is under the line. Well under the old rules it was by eligibility, so even if you weren’t using the plan, you counted.
Dave: A lot of changes.
Kim: And then they have to have the audit. Well now if they change it, the participant definition, to be just somebody who’s using that plan, the chances those companies won’t be required to have the audit any more, and hopefully that will actually get rid of some of the dabblers. Unfortunately, that sounds great to everybody, like, “Hey I don’t have to have an audit anymore!” But on top of that, they sort of also added these other documentation requirements to the form 5500, increasing the amount of information you have to provide them. So even if you aren’t an auditable client anymore, there may still be a lot more information you have to do as a result of the same regulation that you thought would save you some time, it might not.
Dave: Well going back to the dabblers in pension plans and tax returns, obviously it’s a very detailed industry and service. According to my notes, and I don’t know if this is totally accurate, but it’s in the ballpark. I think Rea & Associates performs in excess of a hundred employee benefit plans in a year. That’s accurate?
Kim: That’s accurate, yes. Yeah.
Dave: So you’re not a dabbler?
Kim: No, we as a firm really don’t want to be a dabbler. We’ve actually taken it on to make this one of our segments, to make it an important part of our everyday business, and to segregate a group of people who become really informed about how to perform these audits and move forward.
Dave: You know one of the things I noticed in your bio before today, I knew you had a personality, I’m pretty good about that. But you make note that you say one of your goals is you strive to treat our clients like family and friends, and I thought that was pretty cool.
Kim: Yeah I don’t want to just be the person that they hate to see walking in the door, they have to see me. I like to be somebody they can just talk to. Sit down, it doesn’t have to be about business, it doesn’t have to be about the audit that I may be working on, it can just be what’s happening with your grandkids? And I think that’s a very important part of our relationships with our clients, it’s not always about getting the work done. We always want to do that efficiently, but if I have to take an hour to talk to a client, that doesn’t bug me at all.
Dave: Well I think people in general are just cautious or afraid of auditors, because there’s the IRS auditor, there’s the EPA auditor, now there’s the financial statement auditor.
Kim: Yeah. I always like to tell them, “How soon are you looking to get me out of here? What would sound good to you?” Because when we come in, there are sometimes employees, we might be out in the middle of a room with a bunch of employees of the same company, but they don’t work with us maybe, and I don’t get the chance to talk to them, and they don’t know me, but they look at us and they see we might be in our suits or whatever, and they think it’s the danger zone. Also, especially with these audits, we tend to send a lot of confirmation letters out, and the employees think that automatically means there’s something wrong. “You’re auditing this, what’s wrong?” So I get phone calls where they’re asking questions about, “Why did I receive this letter? What’s going on?” And I just have to explain we’re doing an annual compliance audit, you may get picked this year, you may not get picked next year, we just want to verify that what’s happening is true with them. But they do. The first assumption with an audit is that something has gone horribly wrong.
Dave: Let’s go back to these three up and coming regulations, or ones that will be in play by the time this podcast is broadcast. But what about he impact of these regulations, what are they gonna have on the plan sponsors and the administrators?
Kim: So the fiduciary rule, they have always have that active for them as plan sponsors. They’ve always had to act in the best interest of their employees. But when you’re bringing the investment advisor in at the same time, they may choose not to be your investment advisor anymore, because of the risk associated with taking on that responsibility. And it doesn’t prevent them, for example, advertising certain investments. But they can’t then sit down and go, “We recommend for your plan that you do this.” So if you have an investment advisor, which isn’t always the case, but some plans do take the effort and hire one, you gotta get in front of them and say, “Hey, are you going to be a fiduciary for us based on what you do?” You need to be identifying that because you’re responsible for making sure that investment advisor acts in the best interest of your people.
And second, are our services gonna change? As a plan sponsor, you need to know if I’m expecting you to come to our monthly meeting or quarterly meeting and provide all of this, and you don’t want to come anymore, well I need to find somebody else who will. And it’s true, it might be a more difficult environment to get that to happen, but you have to be prepared. Same thing, the 5500 changes aren’t official. They’ve gone through their comment period and we’re waiting to hear if the DOL is gonna issue final regulations, which may or may not happen, it depends on their budget and what they’re allowed to do, and the new administration out there. But you gotta get in front of it. So be prepared, if you think you might be under the audit requirement, but start preparing yourself for what you’re gonna have to prove. Because you might not in the past have had to prove that you’re acting on your fiduciary responsibility, but now you might have to provide proof. So those board minutes that we always recommend as your auditor, “Hey you really need to have these.” Well, you might not actually have to provide them as proof that you did it. So be looking into those things.
And then on the new audit requirements, testing requirements, those are still, there was a brand new exposure draft just in April, so it’s still in it’s comment period, also not official, might not take effect, just like the DOL 5500 changes til 2019. But it could cause a cost increase. We don’t know how much these regulations are really gonna cause us to have to do more. It looks like we might have to do more procedures, when you have to do more procedures it costs us more time. Well, sometimes we gotta start billing for more, so that could be an impact. As well as you’re gonna have to provide us more documents.
Dave: Oh no.
Kim: We’re gonna be asking for more, I know.
Dave: You’re gonna ask me for more stuff?
Kim: We already-
Dave: Come on that number is okay.
Kim: -ask for a lot of documentation from our clients, we might have to ask for more. We might have to get access to their representatives from their record keeper and be talking to them about that record keeper’s qualifications to issue a certification in order for us to allow us to use it. Those are things that we don’t currently do, but if these regulations come through-
Dave: It’s gonna happen.
Kim: And all of that puts a burden on everybody, but it all depends. So that’s why, they’re asking for comments on that one, and I know our team is putting together a list of comments to pass on, and they want them from everybody. So just ’cause it’s an audit-based requirement, as a plan sponsor it affects you. As an employee it could affect you as well, because if your plan pays for the audit out of your plan assets, that might hit your account. Even if it’s a small piece because you got a lot of employees participating, it still could hit. So you’re gonna wanna get out there and, I wouldn’t suggest reading all of it because it’s a hundred and some pages, but there are notes-
Dave: File
Kim: Quick notes to be able to at least see and then give your opinion on whether or not you think it’s a good thing.
Dave: And auditing these plans has to be getting more and more complicated, with all the electronic transfers and changes that I can make to my plan, I can switch the investments this morning, I can switch them tomorrow, the next day, the next day. I might just do that just so it drives you nuts as an auditor.
Kim: Oh man does it sometimes. ‘Cause sometimes our tests aren’t built to take those into consideration, so we’re always like, “Well it happened, so now let’s expand our testing a little more.” But that’s how you know that the system is working. We’re testing to make sure that what you wanted to happen in your account happened. So you’re more than welcome to make changes, sometimes you’re not our favorite people, but that’s your right, it’s your money.
Dave: But we started talking early in the podcast about the participant, or the employee. A large part of the internal control is the employee looking at their monthly or quarterly statement, in the division of assets, in the income that’s earned, to see if it feels right. And if it doesn’t, they should contact their employer or the auditor in the case of those confirmations as soon as possible.
Kim: Yes, absolutely. I will say that when we’re documenting some of these control processes, the client will say, “Well, our people receive their statements, so if they think something is out of whack, well then they need to contact us, contact the record keeper, contact the auditor in some cases.” We hope it’s not an error that’s major, but if it happens, it happens. I mean I’ve gotten confirmations back before, it was an error when they said it, but they did say that, “I didn’t receive that distribution.” Uh oh.
Dave: Better check on that.
Kim: So we did some extra checking and she was thinking of the wrong year. So once we got back and showed her when it was actually, she was then like, “Oh, you meant the previous year?” And I was like, “Yeah.”
Dave: Are you, in between all these auditing, are you currently working on your 2017 version of your Halloween costume?
Kim: I have not yet, I don’t think retreat is across that now, so I don’t know if we’re gonna have a Halloween party.
Dave: Well, you always-
Kim: I don’t trick or treat at home, so-
Dave: I don’t know if trick or treating in Fifty Shades of Grey would work, would it? You might get arrested for that.
Kim: I might need to walk alongside my niece at least, she might be in a princess outfit, I probably wouldn’t get much candy by myself.
Dave: There you go. Thanks again for joining us on unsuitable today, Kim! Great job. This has been a very informative conversation and I think you cleared up a lot of questions for our listeners. That being said, if anybody has any additional questions for Kim, you can get in touch with her and the rest of the benefit plan audit team by sending an email to podcast@reacap.com. And as always, don’t forget to subscribe to unsuitable on iTunes. Until next time, I’m Dave Cain, encouraging you to loosed up your tie and think outside the box.