Retirement Watch

Four ways financial advisers should help retirement plan sponsor clients avoid a DOL audit

The retirement plan sponsor role comes with a very clear set of regulatory obligations to the Department of Labor — whether your clients are aware of them or not

Apr 15, 2016 @ 11:07 am

By David Borden

Most financial advisers who support the personal planning needs of independent business owners of small- to mid-sized companies are invariably called upon to also help with business advice needs. This frequently includes serving as the financial adviser to the 401(k), defined benefit and other ERISA retirement plans these business owners choose to sponsor for themselves and their employees. Given the relatively smaller size of these plans, small- to mid-sized companies frequently serve as their own plan sponsors in order to keep administrative costs low.

Despite all of the increased regulatory complexity that the U.S. Department of Labor (DOL) has created in this area of financial advice, there's no question that for many small- and mid-sized businesses, setting up these tax advantaged retirement savings and investment plans for themselves and their employees makes solid financial sense.

But the retirement plan sponsor role comes with a very clear set of regulatory obligations to the DOL — whether your clients are aware of them or not. If these regulatory obligations are not met, your clients are exposing themselves to a potential audit by the DOL of their company retirement plans.

Retirement plan advisers to small- or mid-sized companies acting as their own plan sponsor need to know from the outset that failure to be in compliance with DOL rules and regulations with company retirement plans could engender a DOL audit. And a DOL audit has the potential to be every bit as unpleasant as an IRS tax audit from the standpoint of time spent, bureaucratic back-and-forth and potential financial penalties.

(Related: How 401(k) advisers win under the final DOL fiduciary rule)

Thankfully, steering clear of trouble with the DOL on this front isn't necessarily complicated, so long as every small- to mid-sized business that sponsors a retirement plan takes the following top four actions:

1) Develop an investment policy statement that is clearly articulated and up-to-date. Each plan is different and the details of any investment policy statement should reflect this reality. Every investment policy statement — which should be proactively provided to each plan participant — should at least accomplish the following:

• First and foremost, the policy must outline the roles and responsibilities of each person involved in running the plan, such as the trustee, administrator, investment managers and record keeper.

• Additionally, the policy statement should also address key questions such as what criteria is used to select the available investment options, how often those investments are reviewed to ensure they continue to serve the participants well and what is the process is, if necessary, for cycling investments in and out.

2) Benchmark fees against other similar plans. Sponsors, first and foremost, should know how much plan participants are paying in fees even if, as owners of the business, they are invested in the same plan. Be sure to benchmark the fees against other similarly sized plans. Always remember that if regulators ever audit your plans and determine the fees are excessive or not in line with the industry standard, sponsors have been known to pay a heavy price in penalties to both the DOL as well as plan participants.

3) Provide educational resources. Sponsors are obligated to provide plan participants with ongoing educational opportunities regarding the investment options that exist within their retirement plan. Regulators are interested in both the depth of the educational program and the frequency with which it occurs. Therefore, the more vigorous and recurring the program is, the greater the chance that it can survive regulatory scrutiny. Documentation is also important. Note very clearly which employees take advantage of educational opportunities, along with those who do not. That will protect plan sponsors in the event a plan participant makes a claim in the future alleging they were either misled or provided inadequate guidance.

4) Engage employees routinely to maximize participation in the plan. A perennial red flag for the DOL is when a company retirement plan appears to be underutilized relative to the number of W-2 employees within the organization. Under these circumstances, regulators could jump to one of the following conclusions: First, the plan hasn't been made available to all full-time employees. Or, the plan is being leveraged primarily by the owner and participation by other employees of the business is being discouraged to avoid having to make matching contributions. These are all significant violations of DOL rules and could trigger a broader DOL audit.

(More fiduciary coverage: The DOL's final rule, covered from every angle)

What are the possible remedies to low employee participation in company retirement plans? The plan sponsor should regularly engage employees about the importance of saving for retirement and provide a steady drum beat of reminders to enroll in the plan. The business owner/plan sponsor must be sure to extensively document those employee engagement efforts, since regulators will likely want to know what specific steps were taken to increase employee enrollment of this should ever surface as an issue.

Businesses that sponsor retirement plans, more than ever before, need to first understand what their obligations are, and then take the necessary steps to ensure they are fulfilled.

It's up to the financial adviser to these retirement plans to make certain their plan sponsor clients are up to speed on what they need to do to avoid a painful, costly and unnecessary DOL audit.

David Borden is a partner at CCR Wealth Management, an independent wealth management firm with more than $1 billion in client assets.


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