FIDUCIARYBESTPRACTICES 1 “Sure your 401k would pass an audit? Last year, most didn’t,” HRMorning.com, Feb. 21, 2014.2 “DOL retirement plan non-compliance fines up 33 percent,” BenefitsPro.com, Feb. 4, 2014.

AUDITS ON THE RISE

1,000 new DOLinvestigators1

Nearly ¾ of plans audited

resulted in fines or penalties1

IRS targeting plan sponsors with 2,500+ participants

$1.69 billion collected by

DOL in 2013—33% increase

over 20122

An increase in Department of Labor (DOL) audits is expected as ACA implementation continues

Audits ensure compliance with the rules and are a revenue source — impetus for increased audits

Even if the risk is low, the potential ramifications are significant — so, preparation is essential

FIDUCIARYBESTPRACTICES

WHAT CAUSES AN AUDIT?

• Random chance• Participant complaint• Form 5500 issue• Referral between IRS and DOL• Media?

What are some audit statistics? DOL audits happen thousands of times annually, but overall — the chances of an

audit are relatively low In 2012, the DOL conducted 3,500 audits Participant complaints generate about 25% of the audits The DOL identifies areas of interest on which each regional office focuses its

resources - MEWAs are a frequent enforcement target

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COMMONLY REQUESTED DOCUMENTS

• Plan document• Trust agreement• Insurance/annuity contracts• Form 5500 and auditor’s report• Summary Annual Report• Summary Income Statement• Benefit statements• Payroll reports• Deposit confirmation for

participant contributions

• Agreements with service providers

• Document evaluating expenses paid by the plan

• Summary Plan Description• Summary of Material

Modification• Determination Letter• Fidelity Bond• Plan’s loan policy

FIDUCIARYBESTPRACTICES

• Fiduciary may have a personal liability

• Plan committees have become targets for ERISA litigation

• Prudent plan governance can help mitigate risk

FIDUCIARYBESTPRACTICES

FIDUCIARIES AT RISK

PAST COURT CASES:

Tussey v. ABB, Inc.: Failure to monitor fees, negotiate

rebates and much more

Braden v. Wal-Mart Stores: $13.5M settlement for failure to negotiate lower

investment management fees

Tibble v. Edison International: Breach of duty of prudence by including retail-class

shares in plan’s investment menu without investigating cheaper institutional-class alternatives

• One person makes all decisions • Insufficient training • No monitoring of fiduciaries • Lack of documented processes/procedures• Complex plan design• No committee charters• No minutes from committee meetings• Presence of ERISA expense account• No documented evidence on reasonableness of fees• Late participant contributions

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POSSIBLE RED FLAGS DURING A DOL AUDIT

FIDUCIARYBESTPRACTICES

Sources: Page 84, http://www.irs.gov/pub/irs-tege/epche103.pdf & Audit Techniques for 401(k) plans, www.irs.gov/pub/irs-tege/epche603.pdf

FIDUCIARYBESTPRACTICES

POSSIBLE RED FLAGS DURING AN IRS AUDIT

• Incorrect application of eligibility

• Employees not made aware of their right to participate in the plan

• Incorrect vesting calculations• Insufficient non-discrimination

testing/refunds• Incorrect contributions in

comparison to deferral elections and automatic enrollment

• Incorrect definition of compensation used for contributions

• Untimely submission of deferrals and loan payments

• Contributions not within 415 limits

• Trust and plan not operated for the exclusive benefit of participants

• Late submission of Form 5500s, 1099s, etc.

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IRS vs. DOLQualified status of plans,

including examining plans and processing requests for determination letters

IRS

Fiduciary standards, reporting and disclosure requirements

DOL

Potential penalties – average fine in 2013 was $600,0001

Fees from legal council, service provider, etc.

Downtime of human resources staff during audit

Loss of tax deductions for your organization

Excise taxes

FIDUCIARYBESTPRACTICES

POTENTIAL AUDIT OUTCOMES

1 “Sure your 401k would pass an audit? Last year, most didn’t,” HRMorning.com, Feb. 21, 2014.

Costs to your organization: Plan issues:

Lawsuits by plan participants and others

Civil and criminal actions

May lose ability to be a fiduciary going forward

Taxable income to participants

Loss of plan’stax-exempt status

Problems to resolve

Litigation issues:

With proactive practices…hopefully nothing!Otherwise…potential issues could include:

FIDUCIARYBESTPRACTICES

BEING PREPARED FOR AN IRS AUDIT

• Identification of roles/responsibilities internally• Annual Fiduciary training • Review administrative procedures and manuals• Hire experts• Have an up to date fiduciary file • Review governance library• Annual compliance guides• Month-by-month compliance calendar• Plan design modeling • Review of plan documents• Have an outside advisor complete a due diligence• Are you relying on accountant’s audit to find issues?• Have you conducted an internal audit to identify compliance

issues?

HAVE A PROCESS, documentation and monitoring!

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