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Retirement Plans Under Attack by Plan Participants and Government Agencies: An Action Plan for Employers
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Retirement Plans Under Attack by Plan Participants and Government Agencies: An Action Plan for Employers
- 1. #WFwebinar Sponsored by The presentationwill begin at the top of the hour. A dial in number will not be provided. Listen to today’s webinar using your computer’s speakers or headphones. Welcome to the webinar!
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- 5. #WFwebinar Sponsored by Steve J. Friedman Shareholder and Cochair of the Employee Benefits Prac<ce Group Li$ler Mendelson Re6rement Plans Under A:ack by Plan Par6cipants and Government Agencies: An Ac6on Plan for Employers
- 6. Re6rement Plans Under A:ack by Plan Par6cipants and Government Agencies – An Ac<on Plan for Employers Steven J. Friedman • New York
- 7. Current Regulatory Environment – IRS Employee Plans Examina<on Program IRS imposes monetary sanc<ons on employer plan sponsors for: • Failure to operate 401(k)/403(b) plans in accordance with Internal Revenue Code requirements • Failure to follow the terms of the plan documents even if plan opera<on is within compliance with Internal Revenue Code requirements
- 8. Issuance of IRS Revenue Procedures establishing Employee Plans Compliance Resolu<on System: • Requires review of internal controls to qualify for IRS self-‐ correc<on program and mi<gate the amount of IRS monetary sanc<ons • Sanc<ons imposed by IRS on audit even if failures are uninten6onal discrepancies between plan opera<on and plan documents that result in no harm to plan par<cipants • Sanc<ons are based on a percentage of plan assets and can be quite substan<al Current Regulatory Environment – IRS Employee Plans Examina<on Program
- 9. Current Regulatory Environment – IRS Employee Plans Examina<on Program Substan<al increase in enforcement ac<vi<es: • Significant increase in number of audits in the last several years • IRS audits have well exceeded 11,000 • Significant changes to IRS Plan Determina<on Program • IRS examina<on ac<vi<es increases importance of annual review of internal controls to qualify for self-‐correc<on
- 10. Current Regulatory Environment – IRS Employee Plans Examina<on Program Closing agreement = sanc6ons and fines in addi6on to IRS required correc6ons Fact: every re<rement plan has disqualifying defects
- 11. DOL Inves<ga<ons Focus on • Timeliness of Contribu<ons • Expenses – Should they be paid by the plan? – Are they too high? – Vendor Choices • Services • Fiduciary Prac<ces – Commiee Mee<ngs – Minutes of Mee<ngs – Investment Policy – Costs of Investments – RFPs/RFIs – Confiden<ality Policy (Employer Stock Funds) – Vendor Contracts • Disclosures – SPDs/SMMs – Summary Annual Reports – Fees/Services – Mapping/Blackout – QDIAs – Auto enrollment
- 12. Screening Reviews • Replicate IRS and DOL Audits • Discover Defects • Adopt Best Prac<ces • U<lize IRS and DOL Voluntary Correc<on Programs • It is best accomplished through an independent PRIVILEGED legal review that affords protec<on
- 13. 401(k)/403(b) Plan Screening Review The Opera<onal Screening Review would cover one or more problem areas, for example: – Plan eligibility and entry (with a focus on re-‐hires) – Automa<c Enrollment/Increase – Limits on elec<ve deferrals – Timely deposits of par<cipant contribu<ons – Alloca<on of employer and matching contribu<ons – Nondiscrimina<on tes<ng and controlled group – Par<cipant loans and hardship withdrawals, and plan distribu<ons – Composi<on of eligible compensa<on – Spousal consent – 5500 Repor<ng – Corporate ac<on and Plan governance
- 14. 401(k)/403(b) Plan Screening Review • Gather all Plan documenta<on • Interview company employees who administer the Plan to make sure they’re following the Plan; if necessary conduct training • Review vendor contracts and interview vendors for compliance with the Plan documents • Review Par<cipant disclosures and enrollment materials • Review Plan procedures for compliance with the law (e.g., are all required no<ces being given) • Do some sample tes<ng of par<cipant records (e.g., look at plan loans processed over the last year or two) • Correct any errors
- 15. Plan Draeing and Opera<on – Top 10 Errors 1. Automa<c Enrollment/Automa<c Increase – No<ces – QDIA 2. Compensa<on – Overstated – Understated 3. Eligibility of Employees – Too early – Too late – Ineligible Altogether 4. Employee Exclusions – Non Discrimina<on pigalls – Seasonal, part-‐<me, per diem 5. Ves<ng – Elapsed <me or hours pigalls
- 16. Plan Draeing and Opera<on – Top 10 Errors 6. Forfeitures – Timing – Reduce or reallocate 7. Safe Harbor Contribu<ons – No<ces – Alloca<ons – Amendments 8. In-‐Service Distribu<ons – Loans – Hardship – Illiquid assets 9. Distribu<on Types – Lump Sum – Installment 10. Matching True-‐up
- 17. IRS Voluntary Correc<ons • Self-‐Correc<on Program – Insignificant failures – Significant failures if corrected quickly enough • Voluntary Correc<on Program – Significant failures – Retroac<ve plan amendment
- 18. Who are the Plan Fiduciaries? • If any of the following – – Discre<onary responsibility for administra<on – Exercises discre<onary authority or control over plan assets – Provides investment advice for a fee • DOL’s expansion of fiduciaries
- 19. Iden<fying the ERISA Fiduciary • Named fiduciary – a fiduciary who is named in the plan document or who, pursuant to a procedure specified in the plan, is iden<fied as a fiduciary. Common named fiduciaries are the sponsoring employer and the employer’s board of directors. • Deemed fiduciary – an individual or en<ty that performs a fiduciary func<on regardless of whether such individual or en<ty is actually named as a fiduciary – For late deferrals, this would be the person who approves the ACH transfer of contribu<ons to the trust or signs the contribu<on check
- 20. Fiduciary Func<ons • Plan administra<on, including claims • Plan investments • Plan expenses paid from plan assets • Selec<on and monitoring persons performing fiduciary du<es • Par<cipant communica<ons
- 21. Which Hat Are You Wearing? • ERISA allows employers to wear “two hats” • It is important to know which hat you are wearing because ERISA’s fiduciary rules may apply
- 22. Which Hat Are You Wearing? Selor • Plan Design • Amendment or Termina<on • Employee Communica<ons about corporate issues • Aorney-‐Client Privilege applies Fiduciary • Plan Administra<on • Implementa<on of Amendment/Termina<on • Holding/Inves<ng Plan Assets • Appoin<ng a fiduciary • Par<cipant Communica<ons • Aorney-‐client privilege may not apply
- 23. General ERISA Fiduciary Du<es • Exclusive Benefit Duty • Prudent Person Duty • Diversifica<on Duty • Plan Adherence Duty • Disclosure Duty • Duty to Monitor • Co-‐Fiduciary Liability
- 24. How the Commiee Implements Procedural Prudence • Selec<on of providers • Request compe<ng bids from service providers • Evaluate creden<als and capabili<es • Understand compensa<on arrangement • Evaluate contract terms for reasonableness (e.g., termina<on penal<es) • Check references • Regularly monitor and adjust when appropriate
- 25. Diversifica<on Requirement: Fiduciary Protec4on • ERISA Sec<on 404(c) provides some fiduciary relief for investment losses resul<ng from par<cipant elec<ons in par<cipant directed plans • Plan which complies with ERISA Sec<on 404(c): – Opportunity to Control: Par<cipant must be provided an opportunity to control assets of his or her individual account – Diversified Choice: Par<cipant must be en<tled to choose from a broad range of diversified investment alterna<ves – Actual Control: Par<cipant must actually exercise independent control
- 26. Managing Fiduciary Responsibility Plan Commiee Opera<on • Set a structure for opera<ons, such as guidelines for reviewing investment alterna<ves or for handling claims • Select service providers to assist with Commiee func<ons (e.g., investment advisor, accountant, fiduciary advisor) • Determine how plan-‐related expenses will be evaluated and, if permied under the plan, paid out of plan assets • Set up regular mee<ngs • Set up procedure for documen<ng all mee<ngs held and ac<ons taken and providing minutes to monitoring fiduciary
- 27. Breach of Fiduciary Rules Protec<ons from Fiduciary Liability • Monitor other fiduciaries/ service providers • Conduct plan self-‐screening reviews • U<lize IRS/DOL compliance programs to correct plan and fiduciary failures when they occur • Procure liability coverage for fiduciaries
- 28. DOL Voluntary Correc<on Programs • Voluntary Fiduciary Correc<on Program – Online calculator • Delinquent Filer Program – Large Plans – Small Plans
- 29. Recent Li<ga<on • 401(k) Fee Cases – ERISA breach of fiduciary duty lawsuits were filed against large publicly traded companies and several 401(k) service providers
- 30. Recent Li<ga<on • The suits included a variety of allega<ons, including: – Fees and expenses paid by the plans were unreasonable – Plan fiduciaries failed to monitor the fees and expenses, and did not understand the fees – Plan fiduciaries failed to properly disclose fees – Plan fiduciaries failed to select lowest investment class – Plan fiduciaries were conflicted – Plan fiduciaries failed to have procedures to properly iden<fy, review, and monitor fees and expenses
- 31. What to Do to Prevent Errors? • Communicate with Vendors • Communicate within organiza<on (Payroll/HR/Legal) • Read and Retain Documents and Contracts • Review Regularly – Plan Document and Opera<on Review – Fiduciary Compliance Review
- 32. Fiduciary Compliance Review A Fiduciary Compliance Review would examine: – Prudent selec<on and monitoring of plan investments – “Reasonable” Plan fees and costs – Par<cipant disclosures and communica<ons – Timely deposits of par<cipant contribu<ons – Poten<al conflicts of Company and plan interests – Plan governance and procedural due diligence – Adequacy of fidelity bonds, fiduciary liability insurance, and indemnifica<ons
- 33. Fiduciary Compliance Review • Review Plan documenta<on (i.e., including the “boilerplate”) to determine who does what • Iden<fy all the Plan fiduciaries and their intended func<ons • Make sure all delega<ons are in place • Interview fiduciaries who are Company employees to make sure they’re doing what they’re supposed to do (especially payroll) • Establish and conduct periodic fiduciary training • Review vendor contracts for extent of fiduciary liability • Interview third-‐party service providers (e.g., investment managers) for compliance with the Plan • Review Plan fiduciary mee<ngs and minutes for adherence to DOL guidance • Correct any errors
- 34.
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