Risk is discussed in many contexts in the retirement plan industry. It comes up as a sales tactic; as good counsel from trusted advisors preaching procedural prudence; or, often, in the form of intimidating industry vernacular like fiduciary liability, fidelity bond or the big, bad Department of Labor.

This DOL paranoia is an underlying motivation that drives the risk conversation with distributors and retirement plan sponsors. Naturally, the question of probability comes up: What is the likelihood the DOL will audit my plan? The answer is low, but it can happen.

When evaluating retirement plans in terms of risk, it’s best viewed as a spectrum. Generally, risk falls into three principal areas of concern.

[Image: Bloomberg]
[Image: Bloomberg]

Lawsuit risk: The likelihood of a fiduciary-based lawsuit for most plan sponsors is very low. However, if this does arise, it will be unpleasant and expensive, both financially and in terms of reputation.

Administrative breach: Upon inspection, most plans will have some kind of operational defect. Typically, these are either an administrative, fiduciary or a document-level defect. If left uncorrected, they are potentially disqualifying. The good news is the IRS has corrective methods in place for the most common errors. Generally, these are relatively inexpensive to correct but will cost clients a little time and money, and likely some aggravation.

DOL/IRS audit risk: It’s usually the administrative breach discussed above that leads to the DOL/IRS investigation or audit. These agencies are not interested in disqualifying plans; they are more interested in correcting them and protecting the participants from misdeeds (intentional or not).

When a DOL audit does happen, it tends to occur because someone invited investigation. This could be the result of a disgruntled former employee, a standard IRS audit that somehow spiraled into a full DOL investigation or a variety of other reasons. So, what can employers and their service providers do to avoid an audit?

The IRS and DOL don’t publish an official list of items that could lead to an investigation, but it’s a good idea to look at your plan’s most recent IRS Form 5500 filings to decrease the likelihood of an audit. This is publicly available information that can signal to government agencies that something might be wrong and they should take a closer look. Some of the more common red flags include:

· Line items that are left blank when the instructions require an answer
· Inconsistencies in the data disclosed on the Form 5500 schedules
· A large drop in the number of participants from one year to the next
· A large dollar amount in the “Other” asset line on the Schedule H
· Having an insufficient level for the plan’s required Fidelity Bond
· Consistently late deposits or deferrals and hard-to-value or non-marketable investments (including self-directed brokerage accounts or employer stock) could be counted as red flags as well.

Plan sponsors should make sure that 5500s are completed with the same care and attention to detail used when filling out IRS 1040, and ensure the plan is being governed properly and in compliance with ERISA. This can be a challenge even for the most well-intentioned plan sponsors, given the complexity of the task and the fact that most employers don’t have the expertise in-house.

Calling in a specialist

But you don’t need to navigate these waters on your own. Instead, you might consider the “Prudent Man” rule, which implies that when expertise is required yet absent, a prudent person outsources the needed expertise. There is a wealth of talented retirement plan specialists and advisors available to help guide you through the audit process or, better yet, steer clear of it altogether.

When considering whether to employ one of these specialists, you will need to evaluate their experience, expertise and training, as well as if they provide services to help the plan sponsor keep the DOL (and the IRS) out of their offices. Some commonly available services include:

5500 reviews to help plan sponsors avoid potential audit triggers
Coaching services to help plan sponsors identify and eliminate some of those difficult-to-value assets like employer stock or self-directed brokerage accounts
Service provider evaluations to help plan sponsors identify those who will work as a plan fiduciary and put the appropriate guardrails in place on an automated basis

In conclusion, the best way to survive a potential DOL investigation or IRS audit is to avoid one altogether. Committing to best practices for running the plan may mean outsourcing a great deal of the work to specialist retirement plan providers and advisors. Plan sponsors would be wise to consider working with service providers who operate as plan fiduciaries themselves. In this way, you’re more likely to avoid problems and achieve better plan results, leading to better outcomes for everyone.

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Jason Grantz

Jason Grantz

Jason Grantz, AIFA, QPA, is the director of institutional retirement consulting at Unified Trust Company.