Compliance February 9, 2007

Fiduciary Breach Costs CPA $5,000

A California CPA firm will have to pay $5,000 in restitution to an employee stock ownership plan (ESOP), to resolve a lawsuit alleging that the CPA firm knowingly participated in fiduciary breaches under the Employee Retirement Income Security Act (ERISA).
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In addition to a restitution payment, the CPA firm must pay a $1,000 civil monetary penalty to the Department of Labor (DoL), and must establish a program that ensures that personnel must have completed a minimum of eight hours of professional education related to employee benefit plan audits within three years prior to signing a plan audit opinion or managing a plan audit engagement.

Ahlstrom & Baker CPAs in Los Alamos, California was alleged to have knowingly participated in breaches by the committee members for the ESOP of Rehab Consultants of Florida Inc. (RCI) and others when the firm failed to disclose in its audit report that the plan was not receiving employer contributions needed to make loan payments on RCI stock purchased by the plan, according to a press release from the DoL.

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“The law requires audit of employee benefit plans with 100 or more participants,” said Howard Marsh, director of the Atlanta regional office of the Labor Department’s Employee Benefits Security Administration (EBSA), in the press release. “These audits provide important information for plan fiduciaries and the government about the financial soundness of a plan.”

In February 2006, the DoL sued three plan committee members for allowing the plan to engage in a prohibited transaction that included $170, 000 in loan payments from the plan to RCI, which was later dissolved and the plan committee members resigned without providing for continued management of the plan. The value of the stock purchased by the ESOP, which the Labor Department alleges the defendants abandoned, declined from $19.74 per share in 1996 to $.79 per share in 1998 and is currently worthless, according to a DoL press release.

The suit was Chao v. Gentzel, Civil Action No. 06-CV-0448.

The Markets February 9, 2007

All Equity Markets Gain in Q406

Modest overall economic growth and a subsiding of inflation fears contributed to strong performance from U.S. equity markets in the last quarter of 2006, according to Mercer Investment Consulting (Mercer IC).
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Mercer IC’s fourth-quarter 2006 Defined Contribution Universe Summary found gains in all equity markets, according to a news release; while the international equity asset class bested U.S. equities for the quarter by 3.7%, the global equities gained 8.4% for the period but lagged international equities by 200 basis points.

Looking at the broader market indexes, the S&P 500 Index gained 6.7%, while the fixed income asset class turned in a positive quarter with the Lehman Aggregate Bond Index posting a 1.2% gain. Money market instruments rose 1.3% while the balanced asset class, using a benchmark of 60% S&P 500/40% Lehman Aggregate Bond, posted a gain of 4.5%. International equity markets gained 10.4% during the quarter.

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Capital market returns remain solidly positive over the long term, according to Mercer. Over a 10-year time frame, the S&P 500 Index returned 8.4% while the Russell 2000 Index returned 9.4%.

International equity markets produced a smaller gain of 7.7% over a 10-year time frame, lagging their U.S. counterparts. Over a 10-year period, the fixed income asset class, as measured by the Lehman Aggregate Bond Index, produced a return of 6.2%, which was below U.S. equity returns over the same time period but with significantly less risk, according to the Mercer analysts.

Style Differences

Looking at investing style, value funds outperformed growth funds in the fourth quarter as the median large cap value fund posted a gain of 7.3% compared to a gain of 5.4% for the median large cap growth fund. The small cap segment of the market followed along with large cap stocks, as the median small cap value fund outperformed the median small cap growth fund by a margin of 60 basis points.

The median large cap fund equaled the S&P 500 Index for the fourth quarter. Small cap funds outperformed their large cap counterparts for the quarter, as the median small cap fund gained 8.1% for the quarter versus a gain of 6.7% for the median large cap fund, Mercer said.

Within the international equity asset class, the median manager outperformed the index by 20 basis points during the quarter. The median emerging markets manager gained 17.5% for the quarter and lagged the index by 10 basis points, Mercer said.

The median core fixed income fund outperformed the index by 10 basis points for the fourth quarter.

More information is at www.mercerIC.us. A free registration is required.

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