Compliance May 29, 2015

DOL Wants More Control over Plan Audits

A new report from the Department of Labor suggests the quality of benefit plan audits performed by certified public accountants is lagging, with major deficiencies found in four of every 10 audits reviewed.
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The U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) has published its study of the quality of benefit plan audits performed by certified public accountants (CPAs), “Assessing the Quality of Employee Benefit Plan Audits.”

The agency says the report reveals serious issues with the current system. “The existing patchwork of regulations and rules needs to be overhauled and a meaningful enforcement mechanism needs to be created,” says Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “The department is proposing, among other measures, legislation that will fix these problems.”

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More than 7,300 licensed CPAs nationwide audit more than 81,000 employee benefit plans, according to the EBSA. The agency’s review found that only 61% of audits fully complied with professional auditing standards or had only minor deficiencies under professional standards. The remaining 39% of the audits contained major deficiencies, however, which put $653 billion and 22.5 million plan participants and beneficiaries at risk. These figures reflect increases in the amount of plan assets and number of plan participants at risk compared with prior EBSA studies.

NEXT: How the AICPA is addressing poor audit quality.

The American Institute of Certified Public Accountants (AICPA) anticipated the study results. “Poor audit work is a concern to us. It is unacceptable. It is something we take very seriously,” Sue Coffey, the AICPA’s senior vice president for public practice and global alliances, previously told PLANADVISER. 

Coffey said, in 2017, the institute will be rolling out a new CPA exam with new content and a new technology platform to not only test individuals’ knowledge but their competency. She added that the institute is issuing a competency framework for employee benefit plans to help practitioners assess whether they have the competency needed for employee benefit plan financial audits and, if not, what curriculum they need to gain competency.

And, early next year, the AICPA will be launching an employee benefit plan certificate program to allow practitioners to show their competency.

In a statement in response to the release of the audit quality report, the AICPA says it is addressing quality issues through its Enhancing Audit Quality initiative, which has a special focus on employee benefit plans. “Our recently issued Six-Point Plan to Improve Audits will help our members stay focused on achieving the highest level of performance for financial statement audits. Further, our Employee Benefit Plan Audit Quality Center offers members best practice tools and resources that help improve the quality of audit engagements in this area. In addition, the AICPA is collaborating with the National Association of State Boards of Accountancy on a project to expedite ethics enforcement by allowing our Professional Ethics Division and the DOL to share their respective investigative files with state boards of accountancy.”

NEXT: EBSA recommendations for improvement.

In addition to increased outreach to CPAs and enforcement of audit standards by the EBSA, the report proposes legislative fixes. It recommends that congress amend the Employee Retirement Income Security Act (ERISA) definition of “qualified public accountant” to include additional requirements and qualifications necessary to ensure the quality of plan audits. Under the proposal, the Secretary of Labor would be authorized to issue regulations concerning the qualification requirements.

The report also urges congress to repeal the ERISA limited-scope audit exemption and give the secretary the authority to define when a limited scope audit would be an acceptable substitute for a full audit. “When auditors have to issue a formal and unqualified opinion, they have a powerful incentive to rigorously adhere to professional standards ensuring that their opinion can withstand scrutiny,” the EBSA says. “The limited scope audit exemption undermines this incentive by limiting auditors’ obligations to stand behind the plans’ financial statements.”

Finally, the report suggests ERISA be amended to give the Secretary of Labor authority to establish accounting principles and audit standards to protect the integrity of employee benefit plans and the benefit security of participants and beneficiaries.

In its statement, the AICPA agreed with the recommendation to repeal the ERISA limited-scope audit exemption, and said the EBSA also should initiate a comprehensive education program for plan sponsors to help them understand the critical importance of hiring a quality auditor.

Data & Research May 28, 2015

DC Participants Could More Actively Manage Portfolios

An analysis from Aon Hewitt suggests there’s an opportunity for retirement plan participants to be more proactively involved with their accounts and improve long-term savings.
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Only 15% of defined contribution (DC) retirement plan participants rebalanced their portfolios in 2014—making it one of the lowest trading years on record, according to Aon Hewitt’s analysis of 138 defined contribution plans, representing 3.5 million eligible workers.

Even when eliminating the participants who are fully invested in target-date funds (TDFs) or other premixed portfolio options—which do not require rebalancing—only 19% rebalanced their portfolios. Aon Hewitt also found that on average, participants were invested in just 3.6 different funds, down from 3.7 in 2013 and 3.9 funds in 2012.

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Rob Austin, director of Retirement Research at Aon Hewitt, in Charlotte, North Carolina, tells PLANADVISER that overall, only about half of DC investors in TDFs go all in; half have another investment such as company stock or a bond fund. Even if participants are all in a TDF or managed account, they should periodically consider whether it is still the right investment for them, he suggests.

He adds that if a participant is thinking of retiring earlier or later, or has college costs to prepare for, it may warrant a change to investments—TDFs and/or any other investment. “At least annually look at whether your investments meet your objectives,” he says.

As for participants not in so-called “set it and forget it” investments, Austin notes that it is easy to look at a quarterly statement and, if the overall balance has gone up by a pretty good margin, believe no action is really needed. But, behind the scenes, different types of equity investments have different returns, and different types of bonds do as well. “Wherever they have their assets, the allocation has changed. They should at least sign up for automatic rebalancing, if available, to put their allocations back to the same percentage originally chosen, he says. Austin notes that this also conforms with the adage of selling high and buying low—for example, if large-cap equity had very high returns and bonds underperformed, rebalancing will sell large-cap equities and buy bonds.

Next: Other recommendations can help plan participants maximize their investments.

Aon Hewitt offers other recommendations for plan sponsors to help DC plan participants make the most of their investments:

  • Offer access to help tools. A 2014 analysis from Aon Hewitt and Financial Engines showed that participants who take advantage of help tools, in the form of managed accounts, online advice and target-date funds, fare better than those who go it alone. Providing these resources allows participants the benefit of professional management, in order to optimize their returns.
  • Simplify the fund line-up. Offering multi-manager, white-label or objective-based funds can make the investment process less complex for participants while providing them with better diversification. Additionally, these institutional funds may reduce fees for participants and potentially provide better returns, ultimately improving their long-term savings.
  • Consider lifetime income options. Defined contribution plans have become the primary retirement vehicle for millions of Americans, but few of these plans provide a way for participants to manage their money during retirement. Lifetime income options can help ensure that retirees do not outlive their retirement savings and may remove the need for participants to actively rebalance their portfolios.

“Encouraging lifetime income is important to many employers, though it’s primarily leading-edge companies that are implementing these options for their workers,” explains Austin. “We expect to see more companies move in this direction as they gain a better understanding around new laws on longevity annuities and as the price, availability and quality of these types of products continue to improve.”

The Aon Hewitt analysis also revealed participation in 401(k) plans reached 79% at the end of 2014, the highest participation level since Aon Hewitt began tracking this data in 2002. The average plan balance also hit an all-time high of $100,320, up notably from $91,060 at the end of 2013. In addition, nearly one-quarter of workers (24%) increased their contribution rate in 2014.

These findings make it easy to say things are going well, Austin warns, but plan sponsors need to analyze how these numbers match what they want them to be.

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