Why You Need to Catch and Correct Plan Deficiencies BEFORE Your Plan’s Audit.

If your plan has 100 or more participants, you’re required to have it annually audited and that audit report is required to be filed with your Form 5500 with the Department of Labor (DOL). This is not just an operational detail to be casually taken for granted. Your plan’s audit could be a prelude to, and a roadmap for, a costly DOL enforcement action and/or a potential ERISA class-action lawsuit by your plan’s participants.

Your plan’s Form 5500 and attached audit report is not private. It’s available to the public and can be accessed by literally anyone, including plan participants and class-action attorneys. It only takes one disgruntled employee or former employee, to be the representative plaintiff in a class-action lawsuit against your company (the plan sponsor) and you, personally, as a plan trustee.

In an important cautionary message on this topic, Grechen Harders, of Cohen & Buckmann, points out that: “You need to find problems before the IRS or DOL does.” And, because your audit report will be filed directly with the Department of Labor, “You need to find problems before the retirement plan’s CPA does.

She also points out just how costly the failure of plan sponsors to catch and correct their plan’s deficiencies has proven to be:

“In 2023, the DOL recovered $854.7 million from civil investigations and $444.1 million from resolving complaints. That does not even take litigation recoveries into account or consider activities of the IRS or PBGC. The bottom line is that the DOL found many violations that had not been flagged in plan CPA audits or self-corrected by plan fiduciaries, and the likely reason is that the plan fiduciaries were not doing regular self-audits of their plan operations.” (emphasis mine)

What’s the likelihood that your plan could be deficient in some meaningful way and a potential target? Ms. Harders also reports that:

“The recent statistics released by the Department of Labor (DOL) on the results of last year’s compliance activities and reviews were eye-catching. In the DOL’s recent Audit Quality Study (November 2023), the DOL found a 30% overall deficiency rate for plan audits, and a rise in deficiencies for large plans.” (emphasis mine)

As if this were not concerning enough, the rules for the CPA auditors of plans are also evolving, and you can now expect more attention to be focused on internal controls (and the lack of them) and the growing risks class-action litigation alleging fiduciary imprudence both for excess costs and chronic underperformance of investment choices within plans. The latter are now the largest of the claims being brought against plan sponsors and trustees.

OK, that’s certainly concerning. But exactly how can we (plan sponsors and trustees) “self-audit” our plans?

The short answer is that you’ll need professional help. For non-investment related operational reviews, you may need a periodic review by a qualified law firm. For additional information about and professional help with self-assessment and self-correction of plan deficiencies, see this article by Jeff Mamorsky (one of the drafters of ERISA and a partner at Cohen & Buckmann). Cohen & Buckman is a law firm providing such help and there are others to which we can refer you.

For investment choice-related issues, we believe you should have a review of the investment choices within your plan performed annually by a qualified investment advisory firm. This is one of the core services that we (Trustee Empowerment & Protection, Inc.) offer. We perform that service through use of a patented decision-assistance technology to comparatively evaluate the investment choices within your plan. We perform this analysis not just against a benchmark index but against all other available investment choices within each relevant asset class. In this way plan sponsors and trustees can better demonstrate that they are acting in the best interests of plan participants. They can also provably demonstrate that they are better performing their ERISA-required duty to exercise fiduciary oversight over the investment actions and recommendations of their plan’s investment advisor. We’re making this technology available (with training) available to other investment advisory firms and can provide you with referrals to them.

Isn’t there any way we can do that ourselves? The answer is a qualified, YES. Since chronic underperformance claims are now the largest of the claims being brought against plan sponsors and trustees, we are making this same technology – the Professional RapidReview Tool – directly available, with training, to plan sponsors and trustees.

It will enable you to independently monitor the relative performance of your plan’s investment choices, and can most effectively be used, internally, to prepare for your quarterly meeting with your plan’s investment advisor. For example, if (through use of the Tool) you see that an investment choice has progressively dropped in relative rank (compared to other available choices) or that your investment advisor is recommending a low ranked choice, you will now have a factual basis for asking: “Why is this one being recommended for retention or acquisition rather than any of the higher-ranked funds?”

This has never before been possible. Importantly, if you are a plan sponsor and/or a trustee that has always felt uneasy about having to blindly depend on the advice and recommendations of an investment advisor, whose recommendations you’ve had no way of independently verify, this is a gamechanger. It’s not only empowering, it’s giving you the tool plan sponsors and trustees have always needed to exercise fiduciary oversight in this key area – investment choice selection and ongoing performance monitoring.

Be prepared! The audit of your plan is not “optional” and that audit will directly go to the DOL and be available to the public. Ignoring the issues discussed above will not protect you . . . it’s simply not a wise or prudent strategy.

In taking the recommended protective action, you’ll find the potential improvements in investment performance, as well as the new sense of confidence and control you’ll have, is well worth the modest cost of the Tool and the training, and it can be paid for from plan assets.

For more information, please visit the Insights tab at https://TEPI.tech, or contact Eric Smith, esmith@tepi.tech.

Written by Eric Smith, J.D., President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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