“Now it’s not a question of if you will get audited, but when,” Barton told attendees of the “Washington Update” panel at the PLANSPONSOR National Conference in Chicago.
In the event of an audit, be responsive, cooperative and ask questions to find
out the exact reason why you are being audited, said David Levine, a principal
with Groom Law Group. “Work more collaboratively,” he added. “Inquire about the
purpose, rather than inundate them with information. Don’t send them every
piece of paper. Also, call your lawyer before you respond to make sure [your
reply] addresses what they want.”
Of particular concern to the DOL are fees, disclosures, fiduciary training of
the investment and administrative committees, Barton added. “The DOL will get
an independent expert to testify if fees are out of line. Make sure to train
the committee to actually look at plans,” she warned.
Barton said her firm also is hearing a lot more from the DOL about revenue
sharing. The Employee Retirement Income Security Act (ERISA) “requires plan
assets paid to the plan sponsor to be reasonable,” Barton said. So, plan
sponsors should be sure to ask themselves, “Are revenue sharing fees
reasonable? As plan assets increase, revenue sharing increases. Did the service
provider offer more services are a result?” Make sure to evaluate these fees,
particularly since the 408(b)(2) regulation requiring full fee disclosure to
plan sponsors now puts the onus to understand these fees squarely on the
shoulders of plan sponsors, she recommended.
The DOL has also started “investigating plan sponsors, recordkeepers and other
providers to ensure they are not conflicted on how they get paid,” Levine said.
“It comes down to whether you went through a proper process” to ensure fees are
reasonable and equitable.“There
is no one right way to structure your plan’s fees,” he added. “Do you charge a
flat fee and reimburse the revenue sharing back to the participants? Is it a
large plan that does fee leveling through rebates? DOL hasn’t given guidance.”
The key is to establish the practical reasons why you selected the fee
structure you did to be fair to your participant base, Levine said.
Additionally, “case law on fees has determined that they should line up with
your investment policy statement and [service provider] contracts, and that you
review them periodically.” If they aren’t in agreement, “amend the documents
for the plan.”
According to Levine, the DOL and other agencies in Washington “have a lot of
interest in lifetime income,” so plan sponsors should have this on their radar.
“The DOL has put out guidance saying … they want to put out guidance” about how
to calculate and display lifetime income on participant benefit statements, he
said. Other DOL concerns that are likely
to be raised in 2015: a continued focus on target-date funds and disclosure as
to whether its glidepath takes investors “to” or “through” retirement; guidance
on buying longevity annuity contracts; an expansion of the definition of
fiduciary duty; and self-directed brokerage accounts.
A general rule of thumb that can be helpful to plan sponsors when considering
new investment vehicles or asset classes for their plan, Levine said, is to
“ask if it is a product for product’s sake or something that can be useful to
your participants.” In the coming years, for example, there may be many
individuals without adequate savings who will “retire in place” and not leave
their jobs, Levine said. To “incentivize these people to move on,” an annuity
or lifetime income product might be very useful.
Barton and Levine turned next to enforcement and guidance from the Internal
Revenue Services (IRS). The IRS has two levels of oversight, Levine said. The
first is a voluntary compliance check program whereby the agency will send a
sponsor a six- to 10-question survey. “Be sure to answer the questions,” he
told attendees. “They could be ‘gotcha’s. If you don’t, you will be audited.”
Again, as when dealing with DOL investigators, be both cooperative and
proactive, Levine said. “If the questions are not relevant to your plan, call
If a plan sponsor is unfortunate enough to face a formal audit, they should be
prepared for the long haul, for these audits can last as long as 18 months,
Levine added. “They move in. They want to see how you do things.” Ensure your
documents are all accurate, he advised. “The recordkeeping industry has had its
margins squeezed, and things move quickly. You are responsible, so make sure
things are accurate.”
Barton added: “Be forthcoming.” If you are aware of issues or errors, it is
often a good idea to “disclose things you know are wrong ahead of the audit.”