It is a common misconception among Plan Sponsors that contracting with their third party administrator to act as a trustee of the Plan abdicates their fiduciary responsibility to the Plan and allows them to take a backseat with respect to overseeing the day-to-day operations and transactions of the Plan. This is NOT TRUE! The Plan Sponsor is ultimately the party responsible for every aspect of the Plan’s operations and activity and it is the Plan Sponsor that would be liable for any penalties resulting from operational and compliance issues discovered and enforced by the DOL.
Who is a Plan Fiduciary and What are Their Responsibilities?
Anyone who exercises discretion or control over a plan or its assets is considered a Plan fiduciary. Plan fiduciaries can be one individual or a committee of individuals who have responsibility over the Plan and, in recent years, many more professionals who make investment-related recommendations to the Plan (i.e. investment advisors) are now considered to be fiduciaries of the Plan as well.
The following list outlines the many responsibilities of a Plan fiduciary:
- Act prudently solely on behalf of the Plan and the Plan’s participants and their beneficiaries
- Ensure the Plan Document is being followed
- Ensure the Plan offers properly diversified Plan investments
- Monitor the services and processes being provided by third party providers (i.e. custodian, recordkeeper, etc.)
- Ensure the Plan pays only reasonable expenses
- Keep participants updated appropriately with any significant Plan news or changes
- Ensure the appropriate amount of bonding is in place for the Plan (required to have the lesser of 10% of the Plan’s assets at the beginning of the Plan year, or $500,000)
- Offer education and training to employees about the Plan
- Continue to keep current on changing laws and regulations impacting the Plan and its operations
- Document your due diligence in these fiduciary responsibility areas (i.e. minutes)
- File your Form 5500 timely with audited financial statements (if applicable)
Red Flags during DOL Audits and Enforcement of Audit Findings
Being selected for a DOL audit can have serious consequences for the Plan Sponsor. Plan Sponsors often think service providers will take the blame and suffer the consequences when compliance issues arise, but Plan Sponsors are ultimately responsible for Plan administration and operation and are thus open to suffering serious consequences if significant issues are found during an audit.
DOL audits primarily focus on the fiduciary issues discussed above, as well as reporting and disclosure requirements. These issues can mostly be found in the Form 5500 that Plans are required to file annually. Also, Plan participants or others tied to the Plan can file complaints against Plans, employers or service providers.
As mentioned above, the Form 5500 is a valuable resource for DOL investigators. Filing late or incomplete forms is likely to get investigators’ attention, but the DOL doesn’t stop there. Other major red flags the DOL looks for include:
- Failure to file Form 5500
- Failure to follow the Plan Document
- Imprudent investments
- Improper payment of expenses or compensation to fiduciaries
- Prohibited transactions
- Late remittances of contributions
- Failure to maintain an ERISA bond
If compliance issues are found by the DOL, fines are levied accordingly. The failure to file a Form 5500 will cost a Plan Sponsor $1,100 for each day it is late with no maximum. Penalties for other compliance issues vary, but are significant.
How Can Plan Sponsors Avoid DOL Enforcement?
Given that Plan Sponsors are the ultimate fiduciary of the Plan, it is imperative that they act in the best interests of Plan participants and effectively carry out all of their fiduciary responsibilities. They must ensure the team of other fiduciaries and service providers are aware of the design laid out in the Plan Document and carry out the Plan in accordance with the Plan Document. There is no doubt that Plan Sponsors have many responsibilities to manage, but ensuring your Plan is in compliance should be a top priority. In certain cases, fines and other penalties can destroy not just the Plan, but the Company itself.
Snyder Cohn, PC provides audit services for employee benefit plans. Please contact us if you have any questions or need assistance in this area.
By Chris Crouthamel