Beyond plan violations, DOL investigators closed some 320 criminal investigations in 2013, with 88 indictments and 70 guilty pleas or convictions. Taken together, plan sponsors paid a collective $1.7 billion in plan reimbursements and fines to settle the criminal cases and violations last year alone.
Bruce Ashton, an attorney with tDrinker Biddle & Reath LLP, says those numbers contain a clear message for plan fiduciaries and financial advisers working with retirement plans: the best way to survive an audit unscathed is to avoid it in the first place.
“In my time as a practicing attorney, I’ve rarely if ever been able to help a client avoid a plan audit once they’ve been identified as a possible audit target by the DOL,” Ashton explains. “So clearly the best advice I can give to my clients is to proactively ensure their plans are compliant, and that they are avoiding the triggers used by the DOL to identify potential audit targets.”
Ashton, along with a panel of other legal and audit experts on the second day of the 2014 NAPA 401(k) Summit, hosted by the National Association of Plan Advisers (NAPA) in New Orleans, shared best practices for avoiding and surviving plan audits.
The DOL and Internal Revenue Service (IRS) rely on a number of triggers to efficiently direct investigation efforts, he says. Perhaps the strongest is a participant complaint filed directly with the DOL or IRS, Ashton says, which tends to happen when plan fiduciaries consistently ignore participant questions or concerns. Advisers should ensure their sponsors have a robust communications system in place to field and address participant anxieties—and any complaints that arise should be taken seriously, Ashton suggests. Again, the key is to find a solution before a complaint is filed or an audit is launched.
Other common triggers include both minor and significant mistakes on required annual plan disclosures, especially Form 5500. In the eyes of government auditors, a small mistake on critical documentation could signal more substantial issues with plan governance efforts, Ashton notes.
Janet Nahorney, a certified public accountant and partner at the accounting firm BlumShapiro, explains that another trigger used by the DOL and the IRS doesn’t involve actual mistakes. If a plan is working with an auditing firm that only dabbles in the retirement plan space to complete its required annual testing, that can signal to federal regulators that the plan may not be receiving adequate oversight and therefore deserves a closer look.
“Over the years, a majority of reputable accounting firms that do benefit plan audits have joined the Employee Benefit Plan Audit Quality Center, so that’s an important thing to note,” Nahorney says. “My advice is to make sure those who are reviewing your plan regularly are registered with the center. That will be viewed favorably by the DOL.”
Other common audit triggers include negative news stories, either directly related to the retirement plan or a company’s general management practices, Nahorney says. The DOL also takes note of bankruptcy filings and how they may impact plan participants, she says.
Once an audit is triggered, say Ashton and Nahorney, plan fiduciaries should cooperate fully with the DOL and provide whatever information is requested. The deadline for returning requested plan data is typically 10 days, Ashton says.
Ashton suggest that plan fiduciaries should be sure to return requested information to the DOL in a timely fashion, but it’s important to have enough time to completely review what’s required and what violations, if any, may arise from the disclosures. That usually means a plan will have to file for a reasonable extension, such as an extra two or three weeks, which the DOL almost always grants, Ashton says.
Nahorney says it’s critical to be upfront about any violations, potential or actual, contained in the disclosures—as the DOL will find them, and the federal regulators take a far more favorable view of plan fiduciaries that are honest about mistakes or compliance issues that exist in their plan. This can also improve the likelihood that compliance issues will be viewed as mistakes, rather than willful violations.
“We get questions from sponsors and service providers who ask, ‘Why should I point out my mistakes? Let the DOL find them,’ ” Ashton says. “Well, they will find them—it’s better to be proactive.”
Ashton suggests plan fiduciaries make full use of the time between when an audit is triggered and when DOL or IRS investigators arrive (or conduct phone reviews). If the fiduciaries can put fixes in place before the auditors even identify specific problems, that may not absolve the fiduciaries of all liability, but it will go a long way toward satisfying the auditors and improving outcomes.
Of course, while it’s absolutely essential to give the DOL the information it requests, Ashton points out that there is no need to supply information that is not specifically requested by the DOL. So it’s important to keep close track of what is being turned over to the DOL, and for what purposes.
Once all the required information is submitted, Nahorney says, it becomes a game of hurry up and wait.
“I’ve seen audits that have lasted for years,” she says, pointing to an extreme example that took more than five years to close. “At the end, you’ll either be cleared or, if there are problems, you’ll need an attorney to negotiate a reasonable outcome with the regulators.”
Ashton is quick to point out that sponsors and fiduciary advisers should not roll over and play dead when a violation is found and penalties or plan reimbursements are sought by the DOL or IRS.
“Sometimes the DOL investigators do make mistakes,” Ashton says. “Don’t just enter a ‘settlement,’ because there are extra penalties involved with a settlement. Very often we send a letter back that says we disagree wholeheartedly with your conclusion, but nevertheless we put $5,000 back into the plan voluntarily, or whatever amount the DOL is pursuing. We make it clear that we’re not settling with the DOL and triggering additional penalties. Be very careful about not settling.”