"WHILE MOST employers are not investment advisers, we do see some workplaces where employers examine the investment options and suggest investments based on an employee’s risk threshold and life circumstances. On the other hand, there are also employers who take a totally hands-off approach," said Michael Young, a manager at the CPA firm of Sullivan & Co.
Michael Young is a manager at the CPA firm of Sullivan & Co., where he focuses on audits of employee pensions plans. He holds an undergraduate degree in Accounting and an MBA from Bryant University. He is active as a member of the Accounting and Auditing committee of the Rhode Island Society of Certified Public Accountants.
The U.S. Department of Labor reports that there are 483,000 retirement plans serving 72 million workers in the United States. Fringe benefit packages such as 401(k) plans are a valuable option to promote financial security in retirement.
Employers, however, have a serious fiduciary responsibility to operate their plans in what the Department of Labor deems “a prudent manner.” In some instances, employers have been found liable for not acting judiciously, whether as a result of legal actions brought by plan participants for lack of investment options or underperforming funds, or even from fraud committed within the company's management team.
PBN: Please clarify what counts as compensation.
YOUNG: The plan document governs how the plan is to be operated. Understand the ins and outs of your plan document to determine what exactly counts as compensation for contribution purposes. One of the most common errors noted from 401k audits is that the definition of compensation in the plan document does not match what management considers compensation. For example, does the plan document include bonuses as part of regular W-2 compensation or does it allow employees to elect a separate deferral percentage? Many employers hand out bonuses at year-end so be sure to clarify if bonuses are part of an employee’s compensation.
PBN: Should employers use outside advisers?
YOUNG: While most employers are not investment advisers, we do see some workplaces where employers examine the investment options and suggest investments based on an employee’s risk threshold and life circumstances. On the other hand, there are also employers who take a totally hands-off approach. In many instances, employers use outside investment advisers to educate their employees and satisfy their obligations from the DOL. However, employers, at a minimum, must understand the type (mutual funds, pooled separate accounts, private equity, real estate) and range (conservative to high risk) of investment vehicles available and the corresponding risks and consequences resulting from changes in market volatility. For example, recent struggles in the real estate market have led some investment companies to restrict disbursements from these types of investments.
PBN: Do you advise a hands-on approach?
YOUNG: Be sure those who operate the 401(k) plan have clearly defined duties and that enough people are reviewing regular activity to correct errors in a timely way. Most well-run plans we see have involvement from owners, as well as the accounting and human resources departments. If there is not internal control documentation available explaining how the employer handles enrollment, remittances/contributions, distributions, etc, 2012 is the time to create those records and be sure they are regularly updated.
PBN: Is there a common problem that can easily be avoided?
YOUNG: In recent years, the biggest trigger for DOL scrutiny has been the timeliness of participants’ contributions into the 401k plans. Under current DOL regulations, participant contributions must be remitted to the plan as soon as the contributions can be reasonably segregated from the plan sponsors’ assets. Based on how companies operate, this can vary. For the most part we see companies pay payroll weekly or bi-weekly during a month. If a company pays its employees weekly, for example, participant contributions must be submitted to the plan on a weekly basis and the remittance process should be consistent for the entire plan year. Delays beyond a week could cause the plan sponsor to incur fines from the DOL if audited.
PBN: Why should employees take an active role?
YOUNG: Know the details of distributions or forfeitures, how the vesting percentages for the participants receiving benefits in the current year are being calculated, and if this agrees with the participants’ personnel folder and payroll history. From an auditor’s perspective, employers often do not double-check the custodian’s information prior to approving distributions.