Why mitigating fiduciary risk is more vital than ever

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As of this year, the IRS will no longer issue determination letters on the tax qualification of individually designed retirement plans. That means plan operations need to be reviewed to avoid IRS monetary sanctions and IRS-required benefit corrections which can be more costly than the sanctions themselves.

The termination of the determination letter program has a lot of implications for plan sponsors.

The IRS said it will not only focus on the plan document but also on plan operations. Because of this, plan auditors will be asking employers for a more robust representation of operational compliance in connection with the plan’s annual financial audit and financial or corporate transactions.

For plan sponsors, prudent business practices necessitate a critical focus on retirement plan compliance. In today’s environment, it’s extremely challenging for plan sponsors to know with reasonable comfort that they have done all they can to comply with the complex, sometimes ambiguous and/or dynamic rules. Accordingly, now more than ever, plan sponsors should focus on both risk mitigation and risk transfer.

Risk mitigation

One of a plan sponsor’s best lines of defense is to retain an independent adviser with fiduciary governance expertise to assess the compliance status of their plans and recommend proactive responses to deficiencies. By identifying issues before an IRS or a Department of Labor audit, plan sponsors will have more flexibility in crafting the solution, and the cost of the solution is more likely to be reduced. In addition to helping plan sponsors correct identified issues on their own, the mere retention of an expert and the apparent commitment to compliance will likely influence how an enforcement authority sees any audit gaps, and it could mitigate the risk of or extent of fines or penalties.

These experts can also help with the certifications and controls required of corporate officers by the Sarbanes-Oxley and Dodd Frank Acts (including those related to retirement plans), and representations in a plan’s annual financial audit asserting that the plan has been operated in accordance with the terms of the plan document and all applicable laws.

Risk transfer

No matter how diligent a plan sponsor may be, there is always a risk of compliance items being missed and/or litigation. After diligent compliance efforts, traditional fiduciary insurance is the best known solution to the risk and cost of compliance corrections and litigation. Today’s insurance products vary in protections offered for litigation and voluntary compliance costs and so it is important for plan sponsors to review their coverage and determine if changes are required. Product wordings can vary dramatically from carrier to carrier with small wording differences potentially having a dramatic impact on coverage. Plan sponsors should periodically review their coverage with fiduciary coverage experts, and determine if changes are required.

Looking forward

In light of the termination of the IRS plan document program, plan sponsors should review their current and ongoing risks, balancing their risk mitigation and risk transfer opportunities. Given that the IRS focus on operations will be a critical in their audits it is extremely important for sponsors to perform an operational review of their plans and make necessary corrections. In addition, they should develop a process whereby changes to plan documents and operations are carefully monitored prospectively.

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