Keep a cool head when the DOL comes knocking

As the number of audits climbs, here's what could put plan sponsors at risk for scrutiny

By Darla Mercado

Mar 25, 2014 @ 11:10 am (Updated 5:44 pm) EST

Did your plan sponsor client receive an audit notice from the Labor Department? First bit of advice: Don't panic.

The DOL, which is quickly becoming a bigger part of financial advisers' lives, has been on a roll with respect to its investigative activities. In fiscal year 2013, it conducted 3,677 investigations, found violations in about 73% of those cases and recovered some $1.7 billion for retirement plans.

The DOL also closed 320 criminal investigations, of which 88 led to indictments and 70 turned into either guilty pleas or convictions, according to data presented at the National Association of Plan Advisors 401(k) Summit in New Orleans on Monday morning.

The NAPA featured a panel of legal experts to provide some advisers with pointers on getting clients through DOL audits and highlighting risk factors.

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First and foremost, the DOL has stepped up its focus on service providers, requesting specific information related to timely contributions of employee deposits, noted panelist Janet Nahorney, a partner at Blum Shapiro & Co.

"They're targeting larger service providers to get more bang for their buck. This way they get someone who handles a lot of assets, and they cover more ground," she said.

Fee transparency in compliance with the DOL's 408(b)(2) regulation has also been an area of focus, as are 403(b) plans. "403(b) plans are at a much greater risk of audit; you have a bull's-eye on your back," Ms. Nahorney warned.

Panelist Bruce Ashton, an attorney with Drinker Biddle & Reath, posted a list of common risk factors that will get the attention of the DOL. Participant complaints tend to grab the department's attention, as do large amounts of "other assets" reported on the annual Form 5500 filed with the DOL.

Valuations that hold constant year after year may also appear suspicious, and referrals from the IRS will also catch the DOL's eye. Even negative news stories can bring the Labor Department to the plan sponsor's door, Mr. Ashton noted.

As contradictory as it sounds, the first word of advice from legal experts is to keep a cool head if the DOL comes knocking.

"If there's an investigation, consult with someone who's been through it before and knows what to do," Mr. Ashton said.

Generally, the DOL will give plan sponsors 10 days to respond to a notice. Ms. Nahorney said it is important that plan sponsors respond in a timely fashion and work with their service providers to pull together the necessary documents.

For advisers working with retirement plans, this is also an opportunity. "Make sure [plan sponsors] know this is a service that you can provide," said Ms. Nahorney, referring to advisers' ability to coordinate with ERISA counsel, fiduciary advisers, third-party administrators and other parties.

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The information the DOL seeks is extremely detailed: They tend to look for payroll data, information on the timeliness of contributions, plan documents, investment policy statements, meeting minutes and ERISA bonding information.

While plan sponsors should be prompt when responding to the DOL, they should make sure they have the time to review all of the information they're providing the DOL before they share it, said Mr. Ashton. Ask for a reasonable extension of three to four weeks to turn over the documents, he suggested.

"Provide the DOL with the information it asks for and only the information it asks for — nothing extraneous," Mr. Ashton said.

With respect to ERISA bonding information, plan fiduciaries need to make sure they have the appropriate coverage and bonding, and to have that figured out long before the DOL comes looking for that information.

Plan fiduciaries and other parties that "handle money" — including ERISA 3(38) investment managers with discretion — need an ERISA or fidelity bond, Mr. Ashton noted.

Advisers should also note that fiduciary insurance is not the same as a bond and it's not the same as errors-and-omissions coverage, he warned. It serves a particular purpose: to protect the plan in the event of a fiduciary breach.

"Don't be comfortable because you have [errors and omissions] and think you're fine," Mr. Ashton said. "We've looked at those insurance policies and most of the time, there's an exclusion for serving as a fiduciary under ERISA."