Using compliance reviews to prepare employers for audit
A retirement plan sponsor has a fiduciary duty to ensure that the plan complies with all federal and state rules and regulations. Plan sponsors must follow the plan’s provisions without deviating from them unless the plan has been amended accordingly. Failure to follow the provisions can lead to plan disqualification. For the 2015 fiscal year, the Employee Benefits Security Administration reported that 67.2% of employee benefit plans investigated resulted in financial penalties or other corrective actions.
An operational compliance review can help. It’s different from a financial audit. An audit reviews the plan as it relates to the presentation of financial data; it is not designed to ensure compliance with all of ERISA’s provisions or other requirements applicable under the Internal Revenue Code. Operational compliance reviews, on the other hand, are concerned with validating the process being reviewed, with no restriction on whether it impacts the financials. An operational compliance reviewer wants to know that the process works, whether it is replicable, and consistent with the plan document.
Where to Begin
First, employers need to define the scope of the plan. To help define the scope, advisers and employers consider the following questions:
- Does the plan sponsor have a prototype, volume submitter, or individually designed plan document?
- Have there been any recent changes to the plan document?
- Have there been any changes to any of the service providers, including payroll and record keepers, over the past few years?
- Has the plan sponsor had to perform any corrections recently, perhaps without fully understanding how the errors occurred?
- Have there been any data changes or file changes as they are provided to the record keeper?
- Is there money in the budget to cover the review?
With the scope defined, a thorough operational compliance review should involve the following key steps:
- Review of the plan document and amendments, along with summary plan descriptions and a summary of material modifications;
- Review of required notices sent to participants, such as quarterly statements, initial and annual 404(a)(5) participant fee disclosures, Qualified Default Investment Alternative notices, safe harbor notices, etc.;
- Review of service provider contracts, such as record keepers and trustees/custodians;
- Discussions with the people who administer the plan, which may include the record keeper, trustee/custodian, payroll and benefits administration personnel;
- Review of plan administrative manuals, record keeper operational manuals, procedural documents and policy statements; and
- Review of sample participant transactions and data for each of the areas being reviewed.
"While this process may lead to the discovery of errors you don’t necessarily want to find, you do want to gain perspective and overall confidence on your plan’s operations."
Reviewing and comparing a record keeper’s administrative or operational manual with the plan document is an essential step in the review process. There tends to be a higher propensity for errors to occur when a record keeper is administering a plan that has an individually designed document versus its own prototype document. Lack of documented procedures can be cause for concern in ensuring the consistency and integrity of administering the plan, especially when there are any changes to the record keeping infrastructure, such as changes to plan provisions, modifications or upgrades to the record keeping system, or even personnel turnover.
While this process may lead to the discovery of errors you don’t necessarily want to find, you do want to gain perspective and overall confidence on your plan’s operations. Aside from finding errors, here are some things you should capture from an operational compliance review:
Areas of improvement for operational efficiency, including opportunities to maximize record keeper’s outsourcing capabilities;
- Answers to questions on whether the plan’s provisions and administration would be considered “typical”, and how they compare to industry best practices;
- An overall rating or report card of how a record keeper or service provider compares to industry peers; and
- Confidence that if your client’s plan is approached by the DOL or IRS, it’s ready for an investigation that will conclude with a letter saying “no further action is contemplated at this time”.
Embarking on an operational review may seem intimidating but, with a well-thought-out plan, process, and the right resources, a successful review will uncover potential issues that can be resolved the IRS or DOL arrive at your client’s door. The rewards for your efforts may include perspective on industry best practices and how you can operate the plan more efficiently.