With nearly 500 in attendance, last month’s Sixth Annual PLANSPONSOR National Conference was a resounding success. Michele Suriano of Castle Rock Investment Company took part in “PSNC 2011: Small Plans, Big Challenges.”
Please feel free to launch a video review of this month’s topic or continue to read on below.
The top news this month is the official extension of the fiduciary-level and participant-level fee disclosure deadlines.
As a review, the fiduciary-level fee disclosures will be provided from your service providers to you and the participant-level disclosures are from you to your participants.
The fiduciary-level disclosures were originally due by July 16th, 2011 but the DOL has provided an extension and you should receive your first set of fee disclosures by January 1st, 2012. Remember you are already required to ensure that only reasonable compensation is paid for the services provided. Ironically, your service providers have not been required to disclose their fees to you.
The participant-level fee disclosure regulation requires you to provide an initial and recurring annual notice with a narrative explanation of the fees that may be deducted from a participant’s account and a quarterly notice which reflects the actual expenses drawn from their accounts. It applies for plan years beginning on or after November 1, 2011 and originally included a 60 day transitional rule but the Department extended the transition to 120 days in order to align the application of these two regulations. So calendar year plans will have to furnish the initial disclosures no later than April 30th, 2012 and the ongoing quarterly statement of fees actually paid by participants no later than May 15th, 2012.
It is a big initiative by the Department to increase transparency so you’ll probably hear more about it as the deadline approaches.
I’ll be in Chicago next week as a panelist at the PLANSPONSOR Conference and hope to share any insights gained in next month’s newsletter. In the meantime, I hope you enjoy the beautiful weather and have a great day.
|Selecting Employee Benefit Plan Auditors|
Please feel free to launch a video review of this month’s topic above or continue to read on below. This month’s topic is a review of some of the major audit initiatives recently launched by the DOL with an emphasis on the selection of your auditor.
As you know, you began filing your Form 5500 electronically last year and the DOL now has the ability to search those forms for “targeted concerns”. We’ve discussed some of these at length but just to review they include:
1. Delayed investment of employee contributions
2. Valuation of employer securities
3. Fees for your service providers
4. Review of low volume financial auditors
The fourth item is the one I want to highlight today since we are in audit season.
Back in 2004, the DOL’s sample of audits found 30% of them to be defective meaning the auditors did not understand or follow established practices and requirements. The problem the DOL ran into is that they have no authority to discipline or sanction auditors even though they are the primary overseer of audits for ERISA covered plans. So they tasked the 2010 ERISA Advisory Council to review the situation since the primary purpose of the audit requirement is to protect plan participants. The Council recently released their findings and the recommendations included:
1. The DOL should require Plan administrators to identify on the Form 5500 whether or not the Plan auditor is a member of The American Institute of Certified Public Accountants Employee Benefit Plan Audit Quality Center.
2. The Department should establish a fiduciary safe harbor in the initial selection of Plan auditors who are members of that same organization.
Please keep in mind that only 20% of the firms that conduct employee benefit plan audits are members of this organization since membership is voluntary. The recommendation from the Council seems fairly aggressive to me but most professionals work under a self-regulatory organization and it appears that this structure would be a version of that.
For your reference there are three attachments to this email. One is published by the AICPA called “The RFP and Auditor Evaluation Process” and the second is “Selecting an Auditor” published by the DOL. My understanding is that you already have a competent auditor engaged for your plan but since this is a priority of the DOL you should quickly review the attachments and keep them in your files for reference.
The third attachment is the 2010 ERISA Advisory Council’s report which highlights another important area that I do not have time to cover this month, which is limited scope audits. The limited scope audit allows you to instruct your auditor not to audit the investment information prepared and certified by a bank or insurance carrier that is regulated by a state or federal agency and that holds the plan assets. The Council recommended that the DOL clarify what kinds of entities are qualified to issue certifications and that you include those certifications with your Form 5500.
We’ll see where all of these recommendations go but for now it is a good idea to keep them in mind and I will let you know if the Department issues any guidance on the matter.
A compliance check does not prohibit the plan sponsor’s use of IRS correction programs to correct plan errors inexpensively. However, an examination involves a revenue agent visitation and precludes a plan sponsor from filing a Voluntary Correction Program application under EPCRS.
In addition to standard examinations, the IRS has increased the number of compliance checks to expand their enforcement presence through correspondence-based contacts.
The EPCU Project Selection Committee has chosen several areas of potential non-compliance and their list of current projects include:
- 403(b) Universal Availability in K-12 Schools
- Form 5330-4979 Excise Tax
- Funding Deficiencies
- Nonbank Trustee Project
- Leased Employee
- Partial Termination
- Simple IRA Plan
- Simplified Employee Pension Plans
The list above is not exhaustive. If you receive correspondence from the IRS please feel free to contact me to assist in fulfilling their information request. Failure to answer the correspondence could lead to an examination of the plan.
Back in May of 2010 the IRS sent letters to 1,200 401(k) plan sponsors instructing them to complete the 401(k) Questionnaireonline by visiting a secure website and using a PIN number provided in the cover letter. Their stated intention is to:
- better understand 401(k) plan compliance issues,
- determine how their tools and voluntary compliance programs are working, and
- identify participant awareness and plan sponsor compliance issues
The IRS wants to “encourage all plan sponsors to use the Questionnaire as an internal control tool to review your plan and determine if it is in compliance.
They also announced that “Non-reponders” will be subjected to a full-scope examination to provide the data needed for their 401(k) market segment analysis.
If your plan is a 401(k) I encourage you to review the questionnaire and highlight the areas of uncertainty that should be addressed. If you need assistance please feel free to contact me.
On the night of January 21st, 2011 the SEC submitted to Congress a staff study recommending a uniform fiduciary standard of conduct for broker-dealers and investment advisers when they provide personalized investment advice about securities to retail investors.
Why did the Dodd-Frank Act require this study?
Most Americans do not know the difference between a broker and an adviser nor do they understand the critical differences between the fiduciary standard and suitability standard.
A fiduciary standard refers to the duty to serve the best interests of its clients, including an obligation not to subordinate clients’ interests to its own. Included in the fiduciary standard are the duties of loyalty and care.
The suitability obligation generally requires a broker-dealer to make recommendations that are consistent with the interests of its customer.
So, who’s too scared to be a fiduciary?
We will find out in the second quarter when the SEC is scheduled to publish proposed regulations to provide that: “the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”
The next few months will exemplify the moral fortitude of our regulators.
On November 26th, 2010, the IRS provided guidance relating to rollovers from 401(k) plans to designated Roth accounts in the same plan (“in-plan Roth rollovers”). They used a Q&A format (20 questions) and below is a summary of three key questions.
Q-2. What amounts are eligible for in-plan Roth rollovers?
A-2. An amount is not eligible for an in-plan Roth rollover unless it satisfies the rules for distribution under the Code and is an eligible rollover distribution…Thus, in the case of a § 401(k) plan participant who has not had a severance from employment, an in-plan Roth rollover from the participant’s pre-tax elective deferral account is permitted to be made only if the participant has reached age 59 ½, has died or become disabled, or receives a qualified reservist distribution.
Q-8. Are in-plan Roth direct rollovers subject to 20% mandatory withholding?
A-8. No…However, a participant electing an in-plan Roth rollover may have to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty.
Q-15. Is a plan amendment providing for in-plan Roth rollovers in a § 401(k) plan required to be adopted by the end of the 2010 plan year?
A-15. No…to give plan sponsors sufficient time to adopt plan amendments and thereby enable plan participants to make in-plan Roth rollovers before the end of the 2010 plan year, the Service is extending the deadline for adopting a plan amendment…to the later of the last day of the plan year in which the amendment is effective or December 31, 2011, provided that the amendment is effective as of the date the plan first operates in accordance with the amendment.
Please speak with your third party administrator and ERISA counsel if you would like to adopt this provision for 2010.
On October 22, 2010 EBSA issued proposed regulations that would more broadly define the circumstances under which a person is considered to be a fiduciary when providing investment advice to an employee benefit plan or a plan’s participants for a fee or other compensation. The definition includes: advice, appraisals or fairness opinions concerning the value of securities or other property; recommendations as to the advisability of investing in, purchasing, holding, or selling securities or other property; or advice or recommendations as to the management of securities or other property.
What was added?
Fiduciary Status will be given to:
- Anyone rendering advice that claims fiduciary status orally or in writing
- Anyone rendering advice with discretionary authority or control with respect to management of the plan, its assets, or administration of the plan
- Those excluded from the definition of investment adviser in section 202(a)(11) of the Advisers Act including banks, lawyers, accountants, engineers, teachers, brokers, dealers, publishers, government security analysts and advisers, and rating agencies
What was removed?
From the old definition requirement:
- Advice be provided on a “regular basis” (the significance does not diminish merely because advice was rendered only once)
- A mutual understanding that the advice will serve as a primary basis for plan investment decisions (when a service provider is retained to render advice, the plan should generally be able to rely on the advice without regard to whether the parties intend it be a primary or lesser basis in the fiduciary’s decision-making)
- The required fulfillment of all conditions of the current 5-part test (satisfaction of any condition of the new definition may result in fiduciary status)
EBSA is currently accepting comments and we expect final regulations to be issued in the spring of 2011 with an effective date following six months after.