For some, “audit” can be the most feared word in the English language. And this year, the Labor Department is doing its utmost to spread the word.
The buzz is that the department is stepping up its efforts to audit 401(k) plans and other employer-sponsored retirement plans.
It is in the middle of hiring 1,000 new employees, including 670 investigators, as part of its increased focus on noncompliance issues.
The results have been eye- popping: 70% of retirement plans audited by the Labor Department were fined, received penalties or had to make reimbursements for errors in 2009 and 2010, according to the latest figures available. Plan sponsors coughed up more than $1 billion in corrections, reinstatements and fines, for an average assessment of $450,000, the department reported.
Although those numbers may be chilling, the wind is expected to blow even harder and colder this year. Fortunately, plan sponsors can help protect themselves from this environment by running to the embrace of their financial adviser.
Whether advisers are huggers or not, they can help clients prepare for the possibility of an audit by helping ensure that their retirement plans are shipshape before an auditor ever knocks on their door.
Advisers are encouraged to conduct a plan review with each of their retirement plan sponsors annually or even biannually, with an eye toward uncovering common problems, many of which can be fixed easily and inexpensively. There is perhaps no better way for advisers to demonstrate their value to plan sponsors, especially in light of the new disclosure regulations for retirement plan fees and commissions taking effect this year.
The cost of fees and commissions pale by comparison with the potential liability associated with adverse findings from a Labor Department audit.
Advisers should look for these common mistakes made by retirement plan sponsors:
Failing to follow their plan document. Plan sponsors are responsible for keeping retirement plans in compliance with tax laws. They also are responsible for communicating any changes to the plan document or plan's operation to anyone servicing their plan. Changes to the plan document also should be made to the summary plan description. Mistakes happen, and when they do, they should be corrected as soon as possible.
Neglecting to enroll new employees in the retirement plan in a timely manner. The plan document should define who is considered an employee and spell out the requirements for when employees become eligible to become plan participants and make elective deferrals to their 401(k) plan. It isn't uncommon for plan administrators to assume mistakenly that their plan doesn't cover part-time workers, or fail to account for employees who choose not to make deferrals when the employer is making contributions to the plan or running nondiscrimination tests.
Ignoring loan provisions. Many 401(k)s permit loans to plan participants. However, plan sponsors should make sure their plan documents allow loans, and spell out provisions for the loans before allowing participants to borrow money from their plan.
Forgetting to file Form 5500. Plan sponsors generally are required to file an accounting of the plan's assets, operations and other details annually. Employers sometimes make the mistake of assuming that a third-party administrator or service provider has filed on their behalf.
Failing to invest the assets on a timely basis. Employers are responsible for contributing elective deferrals by plan participants to the plan's trust. Employers need to determine the earliest date by which they can segregate deferrals from general assets. That date should be compared with the actual deposit dates and any plan document or other requirements.
Although fines for infractions can be stiff, the Labor Department and the Internal Revenue Service, both of which oversee aspects of retirement plan compliance, have taken pains to help plan sponsors spot and correct problems. A self-correction system permits plan sponsors to fix certain plan failures without contacting the IRS or Labor Department.
The key is to be proactive.
It is critical for advisers to review their clients' 401(k) plans for compliance frequently. Doing so won't help a plan sponsor avoid an audit, but it can help make the word “audit” a lot less scary.
E. Thomas Foster Jr. is The Hartford Financial Services Group Inc.'s national spokesman for qualified retirement plans.
