Copyright © 2003 Greenwich Financial Management Inc., a registered investment advisor.  Securities offered exclusively through Purshe Kaplan Sterling Investments of Albany, NY, a NASD member firm.

Employee Benefits Perspective

ERISA and Your Company's Retirement Plan:

Managing the Risk of Federal Audit

            If your company sponsors a qualified retirement plan, whether a defined contribution plan-- such as a 401(k)--or a defined benefit plan, it faces two types of regulation.  The Department of Labor (DOL) enforces regulations relating to the protection of employees.  The Internal Revenue Service enforces the provisions relating to tax treatment.  This article concerns the Department of Labor oversight and the risk of DOL audit.       

Protection for plan participants stems from the federal Employee Retirement Income Security Act of 1974 (ERISA), regulations promulgated under the Act by the DOL, and case law.  Penalties provided for violating ERISA can be both civil and criminal, and liability can be personal as well as corporate.  Criminal penalties for individuals are up to $5,000 and one year in prison; corporations may be fined up to $100,000.  Civil penalties, much more common, can force fiduciaries to make restitution for plan losses resulting from breach of fiduciary duty, or may enjoin certain practices or enforce rights under the plan.  The Sarbanes-Oxley Act of 2002 reformed and toughened certain aspects of ERISA.

What is the objective risk that your company's plan may be audited by the DOL?  The DOL publishes no guidelines concerning this risk, but there are four ways it generally could happen: first, your company could be subject to a random audit; second, employee complaints might trigger an audit; third, you might face a targeted audit based on a current DOL thematic interest;  fourth, you could have an audit triggered by self-reporting under the annual submission of Form 5500 to the IRS.  

            Who is at risk?  In short, the answer is the plan "fiduciaries," including above all the plan sponsor.  Individual responsibility may attach to the named "trustee" of the plan, but could also include potentially those deemed fiduciaries, including the CEO, the CFO, board members, or others, who knew or should known about the status of the retirement plan.  Investment managers, trust banks, brokers, introducers and others, to the extent they provide advice to a qualified plan for compensation, may also be found to be plan fiduciaries.

            It is well-known by specialists in ERISA law that the presence of a sound due diligence record by an employer provides Sherman tank type protection against most routine DOL audits.  Here are some basic documents that auditors will look for:  1> An Investment Policy Statement, broadly describing the goals of the retirement plan, procedures for investment, and rights of plan participants; 2> A Loan Policy Statement (which may also be part of the Investment Policy Statement); 3> A current Summary Plan Description, describing the plan options, and evidence of its broad distribution to plan participants;  4> If you have any self-directed accounts, evidence of full compliance with Section 404(c) regulations.  5> A minute book, recording proceedings of an investment or retirement committee, including evidence of a rigorous annual process of evaluation and monitoring, preferably with quarterly updates.  In most cases, where these documents are in good order, the auditor will close the books and walk back out the door.    Does your company have these documents up to date and in place?

            Employee ownership of company stock is one likely target of DOL attention, given evidence of notorious abuses in such cases as Enron.  Moreover, under Sarbanes-Oxley, there has been restriction of the length of any "lockout period" when employees cannot sell their employer stock. 

            An issue receiving recent DOL attention is promptness of depositing employee funds into plan participant accounts.  Any delay here or attempt to gain interest rate float could lead to sanctions, including, for repeat offenders, charges of embezzlement.

            There is an annual self-audit requirement for all qualified plans with at least 100 participants or accounts.  This audit must be submitted together with Form 5500 to the Department of Labor no more than seven months after the end of the calendar or fiscal year.  There is an up to $1,100 per day charge for filing a late or incomplete report.  Smaller companies sometimes slip up on this requirement as they pass the 100 participant threshold. 

            Procedurally, any transaction that smacks of self-dealing by plan fiduciaries, or that rewards outside vendors or interests excessively at the expense of plan participants, can lead to serious liability.

We've published a brochure that provides more detailed advice for defined contribution plans-"Is Your Defined Contribution Plan Exposing You to Excessive Risk?: Ten Questions You Have to Ask About Your 401(k) or 403(b) Plan."   Please contact us if you would like to receive it.

Andy Szabo, CFA, is Managing Director of Greenwich Financial Management Inc., a Registered Investment Advisor, which advises corporations, partnerships and individuals on retirement plans, insurance benefits and investments.  Questions or comments welcome by phone (203-531-2877) or e-mail: Szabo@GreenwichFinancial.com.