All of us here at DWC thrive on the really geeky stuff, and some of the best discussions start with our pontifications about how different topics impact our clients and our industry. We decided to bring the best of those conversations to you, still with a touch of geekiness but also distilled into easily digested, bite-sized pieces.
What are some potential unknown risks plan sponsors may face with respect to their plans? This quarter our experts have broken down some of the most common risks facing retirement plans, and what you can do to protect yours.
- As originally published in our Q3 2019 newsletter. Didn't get it? Sign up here.
Participating in an Open MEP
Back in 2012, the Department of Labor issued an opinion indicating that so-called open MEPs really are not MEPs at all, but rather are collections of separate stand-alone plans for each participating employer. If the open MEP is filing a single Form 5500 for the entire plan as opposed to correctly filing a separate Form 5500 for each participating entity, each of those entities may be at risk as companies and as plan sponsors. This issue, which goes back many years, may also include lack of proper fidelity bonding and failure to obtain the required IQPA audit.
If you are participating in a MEP and have no idea what we are talking about, the first step is to analyze whether all of the participating employers have the commonality of interest the DOL requires. Think of it as the entities being interdependent on each other and/or having a vested interest in each other’s success. If you cannot answer the commonality question, you are probably ok if you are filing your own Form 5500 each year. If you do not know the commonality and are not filing your own Form 5500, request a formal legal opinion from your advisor, the MEP administrator and/or the MEP auditor citing the specific regulatory authority and relevant facts that allow you to participate in the MEP without filing your own Form 5500.
Paying for Fiduciary Services with Limited or No Added Protection
Read the fine print in your service agreements. If you think this is not a big deal, simply Google the extreme example of the now defunct 3(16) service provider Vantage Benefits Administrators. Plan sponsors should not sign a service contract if their advisor or service provider cannot clearly articulate the value of the service to your plan participants (not to you as the plan sponsor) in terms you understand. Here is an interesting question for all of those folks pushing 3(16) services: how many plans have faced a fiduciary lawsuit in the last few years? We’re not talking about the huge plans with hundreds of millions in assets. How many in your market segment? Not many. Plans and plan sponsors are much more likely to accidentally trip over the complicated IRS testing rules than they are to encounter a fiduciary breach type situation. If you are looking to mitigate risk, a better approach is to simply hire the best service providers and you will most likely end up with better quality and more comprehensive service for less overall cost than what you are paying for the perceived fiduciary protection.
Ignoring Controlled Group Requirements
Companies with certain degrees of overlapping ownership must be combined for purposes of applying plan nondiscrimination requirements. That doesn’t necessarily mean everyone in those combined companies has to participate in the plan, but it does mean the plan must demonstrate that excluding the employees of the “other” company does not violate the nondiscrimination rules. And those are tests that can be very expensive to fix if not discovered until years into the future, especially if the person doing the discovering is an IRS auditor. If any company owners (or their family members) own some or all of another company, make sure you have someone who really knows these rules inside and out do the analysis for you to confirm whether there is enough overlapping ownership for you to be part of the same controlled group.
Terminated a Plan or Changing Providers When You Don't Want to Correct a Compliance Issue
This tends to happen in the small plan marketplace when a business owner is surprised to find out the plan is top-heavy and additional company contributions are required. Or when employees classified as part time must be allowed to join the plan…or any number of other situations with a price tag. Playing audit roulette is not a great idea! Not only does the plan sponsor have the fear of this risk, but an IRS or DOL auditor may look at the plan termination or change in service providers as a deliberate attempt to hide the problem, which often leads to much less mercy and much larger penalties. This can also impact service providers and advisors that directly or indirectly support this decision.
Backdating a Plan Document or Amendment
This can happen for any number of reasons. Maybe a service provider made a mistake and doesn’t want to absorb the cost of correcting it. Presto! Magic amendment to the rescue. Maybe a plan sponsor just forgot to timely sign a new plan document or amendment. Oops! It’s clear we meant to sign it, what’s the harm in signing it after the fact?! Since you asked, it can actually be considered fraud…tax fraud at that. A few years ago, a client’s attorney advised them to backdate an amendment they forgot to sign timely. The plan was audited by the IRS a couple years later and when the auditor discovered the backdating he threatened to have both the attorney and the plan sponsor brought up on criminal fraud charges if they didn’t admit to it and agree to pay some pretty substantial penalties.
Taking Data Security Lightly
Know your service providers’ capabilities and responsibilities. Who is responsible for verifying the identity of a participant requesting a distribution? Be sure that any providers who deal directly with participants can record those interactions - think recordkeeper call centers. Can answers to the security questions call center reps are asking to verify identities easily be found on social media? If so, they are probably not too secure. Work with recordkeepers that offer multi-factor authentication, voice recognition or other security measures to cut down on the risk of fraud. If you are a plan sponsor, don’t approve any distributions if there is any doubt about the identity of the participant. This is especially true for in-service withdrawals!
If you have any questions about the retirement plan traps, or think you might have fallen into one, contact your friendly neighborhood TPA. We're here to answer any questions or lend a hand to ensure that your plan remains in compliance.