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1 HFTP Annual Convention & Tradeshow Rosen Shingle Creek Orlando, FL October 20, 2012 WHO ME?? A FIDUCIARY?!?!?!? Ned McCrory, CPA George Zoglio, CPA, MBA Batchelor, Frechette, McCrory, Michael & Co. CPA 40 Westminster Street Suite 600 Providence, RI (401) Objectives Landscape Audit and reporting requirements Fiduciary responsibilities Regulatory updates DOL/IRS top 10 compliance errors 2 Objectives Fraud risk areas ( Tough Times = Terrible Temptations ) Best practices for plan sponsors What happens if an error does occur? 3 1

2 But first What is the total estimated amount of retirement assets invested in the US? a) 5 trillion b) 8 trillion c) 17 trillion d) 25 trillion 4 But first Of these total assets, how much is invested in Defined Contribution 401(k) and 403(b) plans? a) 4 trillion b) 8 trillion c) 12 trillion d) 15 trillion 5 Landscape Proliferation of 401k/403b plans Great employee recruitment/retention tool The plan is tax-exempt t Employee deferrals and earnings are tax deferred Plans are governed under ERISA Regulated by DOL and IRS 6 2

3 Landscape Survey by Department of Labor found: Employees had a general lack of understanding of how the plan works Communication was lacking between employers (plan sponsors) and employees (plan participants) Employees didn t understand investment options, fees, ability to opt out of automatic enrollment, etc 7 Landscape DOL has taken position that participant education is the greatest safeguard against noncompliance or fraud If a plan violation has occurred: Plan sponsor may be subject to an excise tax Certain employees may need to include what they thought were tax deferred contributions as income An egregious violation may result in the revocation of the plan s tax-exempt status All tax deferred balances now become immediately includable in the employee s gross income 8 Audit and Reporting Requirements Small plans vs. large plans Large plans a plan with 100+ participants at the beginning of the plan year If you have a large plan: Form 5500 (full version) Plan must be audited by an independent CPA If you have a small plan: Form 5500 (shorter version) No audit requirement DOL is increasing focus on plans with less than 100 participants 9 3

4 Audit and Reporting Requirements Definition of a participant If you guess that it is the number of people with balances in the plan.that would be incorrect ERISA defines a participant as:.any individual who is eligible to participate in the plan whether or not the individual elects to contribute or has an account under the plan Participants would include: Any employees who were eligible to participate during the year (whether or not they chose to make deferrals) and Any former employees with accrued vested balances who have not received payment of their balances 10 Fiduciary responsibilities Who is a fiduciary? While ERISA requires at least one named fiduciary there are usually more ERISA considers whoever performs plan functions a fiduciary Functions include exercising discretion or control over a plan Duty to act in a prudent manner 11 Fiduciary responsibilities Fiduciaries include: Trustee Investment advisor Record keeper of participant balances Employer personnel performing plan administrative and management functions Plan committees (i.e. investment committee) Plan sponsor Board of Directors Third party administrator (TPA) 12 4

5 Fiduciary responsibilities Responsibilities of fiduciary: Ensuring that plan provisions including applicable laws and regulations are followed Diversifying plan investments Paying only reasonable plan expenses (including investment fees) Ensuring that the plan does not participate in any prohibited transactions Its not sufficient just to hire a TPA the employer/plan sponsor retains ultimate fiduciary responsibility and must monitor the TPA 13 Diversifying plan investments Plan sponsor must provide a sufficient number of plan investment options How many is enough? Duty to act prudently Sufficient alternatives Must monitor investments/fund performance (can t set it and forget it ) Offering a limited number of investments that continually perform below major market indices (Dow Jones, S & P) is not acting prudently 14 Paying reasonable fees What are reasonable fees No absolute answer must take into account the total fee package for services provided Duty to understand and monitor Reasonable doesn t necessarily mean cheapest means you have performed some sort of due diligence Participant class action lawsuits Kraft Foods Edison International General Dynamics Caterpillar ($16.5M settlement) 15 5

6 Paying reasonable fees How can a fiduciary protect themselves Understand basis of fees (no load, front load, back load, etc.) Consider utilizing a benchmarking service to compare your plan investment fees against others Document results of analysis in meeting minutes (investment committee) 16 ERISA fidelity dishonesty bond Must have an active fidelity dishonesty bond covering at least 10% of plan assets up to $500K of coverage Coverage must be updated as plan assets grow Policy MUST be in the name of the plan Fidelity coverage vs. fiduciary coverage No deductible 17 New disclosures - TPA to plan sponsor - Section 408(b)(2) Disclose fees, conflicts of interest Must be in writing for compensation > $1,000 Must be provided with sufficient time to evaluate Failure to do so will result in a prohibited transaction Final date July 1, 2012 UPDATE THOSE CONTRACTS 18 6

7 New disclosures - sponsor to participant 404c Disclosure required by November 14, 2012 Regularly disclose any fees that are or could be charged to the plan and deducted from participant accounts Regularly disclose any fees that are or could be charged against participant accounts rather than plan-wide (i.e. loans, QDRO, etc.) Plan years starting after November 1, New disclosures - sponsor to participant 404c Also must disclose to participants the following: When a participant can make changes Any limitations on investments changes List of investment options Identification of investment manager Nature of fees front or back end loads, redemption fees, transfer fees 20 New disclosures - sponsor to participant 404c Also must disclose to participants the following: Investment returns over 1, 5 and 10 year periods Benchmark returns for similar period Operating expenses for each fund For a fixed investment return, the amount of that rate 21 7

8 Top 10 list 22 DOL/IRS top 10 plan compliance issues 1) Plan document failures not properly signed and executed 2) Failure to follow the terms of the plan WORSE OR BETTER 3) Failure to follow definition of compensation inconsistent treatment of: Deferrals on bonuses Taxable portion of fringe benefits Other potential compensation such as commissions, moving allowances etc 23 DOL/IRS top 10 plan compliance issues 4) Failure to follow plan matching provisions Participant changes amount of deferral during the year Employer match does not get changed accordingly 5) ADP/ACP failures and errors Actual Deferral Percentage and Actual Contribution Percentage Elements of discrimination testing to ensure plan is not top heavy (disproportionately favors highest compensated participants) Errors include failure to identify highly compensated employee, error in reporting compensation by employer 24 8

9 DOL/IRS top 10 plan compliance issues 6)Failure to deposit participant deferrals (including loan repayments) on a timely basis (HOT HOT HOT) For large plans, deposits must be made as soon as they can be reasonably separated from general assets but no later than the 15 th business day of the month following the month received 15 th of the month day rule is NOT a safe harbor For practical application; 3 business days rule after paycheck date (similar to payroll tax deposits) For small plans, same rule except a safe harbor is 7 business days after date deferral is received from participant 25 DOL/IRS top 10 plan compliance issues 7) Failure to include all eligible employees in census (eligibility testing) 8) Improper limitation of maximum deferral limits (for 2012 the limit is $17,000 before $5,500 catch-up contribution for participants 50 years of age and older) 9) Failure to follow loan provisions Many plans allow loans under certain provisions If participant can apply for loan online, sponsor must still obtain documentation to approve loan 26 DOL/IRS top 10 plan compliance issues 10) Failure to follow hardship distribution rules (if plan provides): Generally for delinquent rent/mortgage payments and medical expenses Could include higher educational expenses Increased due to economy Plan sponsor must obtain and retain documentation proving hardship requirements were met 27 9

10 Fraud risk areas Remember PRO (Pressure, Rationalization, Opportunity) 401k plans not immune (remember Tough Times = Terrible Temptations) While employing a TPA reduces the risk of fraud in a plan, it does not eliminate it Fictitious participant Unauthorized distribution Incorrectly computed vesting percentage Fraudulent loans 28 Fraud risk areas Recommended control procedures Review employee payroll database to ensure all demographic information is accurate Detail review trust/tpa statements to ensure accuracy of all data (contributions, ti loans, etc.) Review participant statements and periodically reconcile to trust statements Send statements DIRECTLY to participants Notify participants that they should always review their statements in detail noting any unusual items, ensuring that investment allocation is proper, etc. 29 Best practices for plan sponsors Identify all plan fiduciaries Establish an investment committee Monitor your service providers Evaluate your plan internal controls Ensure deposits are made timely Monitor your dishonesty bond coverage 30 10

11 What if an error occurs? It s an imperfect world Sometimes honest errors or mistakes occur Voluntary Fiduciary Correction Plan (VFCP) Opportunity to correct self-identified errors Can correct certain transaction errors (late deposits, improper loans) Must make participant and/or plan financially whole 31 Thank You! WHO ME?? A FIDUCIARY?!?! Ned McCrory, CPA George Zoglio, CPA, MBA Batchelor, Frechette, McCrory, Michael & Co. CPA Providence, RI 11