When I asked her about it, she was just so upset that the TPA hadn’t filed the forms and were giving her all sorts of excuses about why they hadn’t taken care of things. And while I totally agreed and could almost sympathize, she was rather taken aback when I inquired if she realized that she was ultimately responsible for filing the appropriate forms and returns, and ensuring that the plan was compliant. She was mistakenly under the impression that the TPA was going to take care of it, and now, because of her own ignorance about her specific fiduciary responsibilities that extend beyond hiring the right company, she was about to spend thousands of dollars and countless hours trying to make everything right. If you are like my friend and think that you have a good TPA and you can trust them to take care of things, I’m not saying that you can’t trust them to do their job, but you as the plan sponsor are directly responsible for compliance and timely filing. So have those discussions with your TPA about what needs to happen and who will do what. And don’t hesitate to ask them when things will happen and how you will know that such things, like filing your 5500, have been taken care of. They may do most of the work, but they still work for you.

Katie Thomas, CPA

Size of Plan

Did you know that terminated employees who are still in your plan cost you extra fees? Much of the audit work is completed based on the participant counts, which include eligible current employees and terminated employees with account balances. Most plans have guidelines for automatic distributions to terminated employees with small balances. Work with your third party administrator or ERISA attorney to ensure you are making the most cost effective decision for your plan. 

Level of Assistance

As a plan administrator much of the audit fee is in your control. The more you do, the less your auditor has to do. The less work your auditor does, the less you pay!

Your auditor should send you a detailed list called a “Client Assistance Request List” or “PBC List” (PBC = Prepared By Client). This should represent the majority of information your auditor will need to complete the audit. As a result, this document is your guide to minimizing fees. Here’s how:

Gather all the information on the list and provide it to your auditor all at once. Most auditors have several clients they are working on simultaneously, the fewer times they have to put down and pick-up your file the less time will be spent on.

If you have questions about something on the PBC List, ask your auditor. Each item on the PBC list has a purpose and providing the wrong thing to the auditor adds time. Similarly, not providing anything causes additional work for the auditor too. Answer no or indicate why you haven’t provided a requested item.

Eliminate the excess. An auditor’s job is to investigate and inquire. If we are given extra paperwork or unrequested documentation, we expect that you have provided it to us for a reason. We will likely review it and ask you why it was provided. Further, most 401k auditors will request documents from the employees’ personnel files. Rather than pulling the entire employee files and handing them to the auditor, flag the specific documents requested or pull them and provide only what has been requested. And if you don’t understand what the auditor is looking for, ask.

Questions from the auditor are inevitable; regardless of how prepared you are as a plan administrator. To minimize fees, respond to the auditor as quickly as possible. They may inquire regarding unusual transactions or may be waiting to hear back regarding the approval of the draft financial statements; the less time the auditor waits the less downtime for your plan and the fewer the excess fees.

A management letter is the plan administrator’s guide to fewer future audit fees. Auditors use the management letter as a tool to advise management as to errors and inefficiencies noted during the audit. Often they include a recommendation for how to prevent the errors or improve the processes going forward. Implementing recommendations from management letters will make for better administration of the plan and as a result, fewer fees.

If you are concerned about your audit fee, talk to your auditor. In addition to recommending the tips I have listed above, they will be able to specifically tell you how your plan can reduce fees.

Jill Smith

The following risks, and mitigating recommendations, will be helpful to the following persons (but not limited to1):

• Director (s) of 401K plans
• Trustee (s) of 401K plans (especially if you are an employee of the 401K Plan provider).
• Plan committees (“Committee”) or those an individual charged with governance.
• All other interested parties that place reliance on a 401k plans operations, and/or financial results. 

Risk #1 – Employee distributions
If a plan administrator can request for terminated employees’ distribution checks to be mailed to their (administrator’s) attention and address, then the plan administrator may have the opportunity to deposit these funds in the company’s name or in his/her name. 

Recommendation – The Committee should request from their 401K plan third party administrator (this is the person that maintains the 401k plan’s asset records and sometimes the assets of the plan), that distribution checks not be mailed to the Administrator’s address. Additionally, for every change of address made by a participant, an address change notice should be mailed to the participant’s prior address and the new address. 

What if I do not have a third party administrator?  If you do not have a third party administrator, then a distribution should be approved by both the plan administrator and the Committee, in which the approval should be evidenced by a distribution request form signed by the terminated employee, the plan administrator and the Committee.

Risk #2 – Employee Distributions subject to vesting
If your Employer contributes to your account on your behalf, then chances are you will earn their contributions based on a vesting schedule.  Upon termination you will want to verify that you receive the correct amount of Employer contributions that you earned. There have been some fraud cases whereby the plan administrator will incorrectly calculate the portion of Employer contributions you earned, and then keep a portion for himself/herself. 

Recommendation – The Committee should put a control in place whereby there is an independent review of the vesting calculation on the distribution, whereby the reviewer is someone other than the preparer of the calculation. 

Risk #3 – Are you paying for the correct administrative fees?
If you pay a third party administrator to perform recordkeeping services and/or custodial services for your plan assets, then you should be aware of the fees you are being charged and paying for the related services, to ensure that you are not being overcharged.

Recommendation – the Committee should review the administrative charges paid by the Plan on a regular basis, and should review their monthly/quarterly statements for accuracy. For example, if your recordkeeper charges $50 per participant loan serviced, and charged you for 20 loans in the month, then you should do an accuracy check against your files and participants requests for loans. 

Risk #4 – General Plan Administration 
It is not uncommon for a smaller 401K plan to have an administrator that performs the majority of the plan’s operations.  While this is probably the most efficient for your company, and makes the most sense that one person can answer all the participants questions, it may provide for too much opportunity to commit fraud in the 401K plan. 

Recommendation – The Committee should have a policy whereby the administrator must take a break from the Plan for an unspecified period of time, with the time determined by the Committee.  The Committee should then have a back-up administrator that is independent of the primary administrator perform the plan operations.  This may allow for any inconsistencies or fraudulent activity to be identified.  Additionally, the Committee should request from the third party administrator for an e-mail to be sent to the Committee for any 401k Plan transaction authorized by the administrator. (i.e. request for participant distributions, loans, contributions to the plan, forfeiture re-allocation requests, etc). 

Victor Fuentes

Footnote: 1Note – this list is not meant to contain all risks that are present in a 401k plan, nor are the risks in any particular order. The recommendations are suggestions only, and are not the only recommendations to mitigate against such risks.  If you are concerned about fraud in your 401k plan, you may consider consulting with an independent auditor qualified to audit employee benefit plans, and/or an attorney specialized in ERISA.

Pros

• Contributions to an ESOP are expenses for the contributing corporation for tax purposes.
• ESOP companies are less likely to be disposed of by sale, merger or liquidation.
• Employee ownership can boost morale, reduce turnover and can be a great selling point when recruiting new employees.
• ESOP company employees usually earn a better compensation package.

Cons

• Many ESOP stock sales are at least partially seller-financed (many times up to 50%).
• The obligations of cash flows for setup, debt payments (financed purchase), audits, appraisals, and retirement payments.
• The sale of a company to an ESOP may not always be the best deal for the stockholder.
• The cash paid to a third party administrator and internal manpower for administration as well.

As you can see, there is a lot to consider when deciding whether or not an ESOP is right for your business and the full list of pros and cons is much longer. 
 

Bobby Mikkelsen

1. What happens to my account when my Employer sponsored 401(k) Plan incurs a partial plan termination?

a) Your employer has terminated the 401(k) Plan and you will have lost all money contributed to the Plan to date.
b) You were a laid-off employee during the Partial Plan termination year, and as such you will automatically be fully vested in accrued benefits, to the extent funded on that date, or in the amounts credited to your account. 
c) Every employee in the company is automatically fully vested in all account balances. 

Hint – read article “Partial Plan Termination” – June 30, 2009 – authored by Jonathan Poppel, CPA.  

2. My employer notified me that they have an automatic enrollment feature to their 401(k) Plan, and I will be automatically enrolled after 3 months of working service. Which of the following is true?

a) I have no alternative, and I have to contribute to the auto-enrollment minimum as required by my employer.
b) I don’t have to worry about tracking my 401(k) contributions or options, as my employer will pick the best fund to invest my money in, and they will ensure that I am enrolled in 3 months time.
c) I have the option to “opt-out” of the auto-enrollment feature, and I should ask my employer for the applicable forms to make this election. 

Hint – read article “Streamlining of the Automatic Enrollment Process” – October 6, 2009 – authored by Shelby Williams

3. True or False:  My employer mentioned that they pay all administrative expenses incurred by the 401(k) Plan. Accordingly, my individual account incurs no fees, and I don’t have to worry about “outrageous” investment fees. 

Hint – read article “The FYI on 401(k) Plan Fees” – November 17, 2009 – authored by Joe Goodmiller

4. My plan administrator told me that I will earn my employer match based on a vesting schedule.  The vesting schedule is:

a) a tiered schedule for what percentage of your income you can contribute.
b) a tiered schedule for when money the employer contributes to your account is yours/earned.
c) A tiered schedule for the penalty you have to pay depending on your age, if you take your money out early.

Hint- its not letter “a” or “c”. Also – you can find this information in your “Summary Plan Description”, which can be provided by your plan administrator.

5. I am a plan administrator and I was recently out from work for 6 weeks due to illness.  No one at work knew how to remit the employee 401(k) contributions to the third party administrator; however we did make sure we deducted the contributions per the participants elections, so we are not out of compliance with regulations, right?

Not exactly.  The DOL Reg. 2510.3-102, “Definition of ‘Plan Assets-Participant Contributions,” states that employee contributions (including amounts withheld and elective contributions) become the Plan’s assets as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets, but no later than the 15th business day after the end of the month from the date on which such amounts are received by the employer or withheld from wages. If the employer does not comply with the regulation, this could be considered a prohibited transaction and should be reported in the annual filing. In some cases the DOL may rule that if the employee contributions were not remitted based on average lead time, then that would constitute a prohibited transaction.  If this has occurred, then you would want to talk to your third party administrator on how to “self-correct” this issue. 

Victor Fuentes

There are two types of service auditor’s reports. The two types of reports provided in a SAS 70 audit are the Type I and Type II reports. A Type I report will give a description of controls in place at the service organization at a particular point in time. A Type II report not only gives the description of the controls, but also includes testing of these controls over a certain amount of time which will not be less than six months (normally, a year is included in the report). The Type II report offers the user of the report to review not only the controls in place at the service organization, but also how each of these controls is operating. If a certain control is not working properly, the user can mitigate the risk at the Plan level by implementing controls needed to adequately protect the Plan participants. Additionally, the Plan trustee might determine that the service organizations services are not adequate that they should be replaced.

To review the controls in place at a service organization, find the section of the report that details the control objectives and related controls. Just so you can see how important the controls are at a service organization, I will provide a few examples of the control objectives being reviewed.

1. Controls provide reasonable assurance that telephone calls from participants are authenticated and resulting transactions are processed by Customer Support Services in an accurate and timely manner.
2. Controls provide reasonable assurance that monetary transactions are authorized and processed accurately, completely and timely in accordance with instructions received.
3. Controls provide reasonable assurance that investment purchases and sales are processed accurately and timely.
4. Controls provide reasonable assurance that participant account balances are valued based on market prices obtained from authorized pricing sources and investment income is accurately and timely allocated and recorded.

As you can see by reading the control objectives above, how controls are operating at a service organization is incredibly important to ensuring a Plan participant’s 401k account including his or her investments are being managed and accounted for. As a user organization with fiduciary responsibilities, it is your responsibility to make sure that adequate controls in the above areas are in place.

The SAS 70 has a great benefit to the user as he or she is able to gain valuable knowledge of how the third party administrator is operating and how well they are implementing the controls they have in place. The user also gains trust in the third party administrator knowing that someone independent of the organization has reviewed and tested the effectiveness of their controls. Another great benefit to having a SAS 70 available is that the report is able to assist the user’s auditor in reducing the audit procedures to be performed during the audit of the Plan’s financial statements.

Shelby Williams

According to www.sas70.com, the SAS 70 audit “represents that a service organization has been through an in-depth audit of their control objectives and control activities, which often include controls over information technology and related processes.” Most third party administrators have had SAS 70 audits performed and can furnish the Plan Fiduciary with the report when requested. When a Plan Fiduciary receives the report, they can review it for information about the control objectives and control activities that are in place at the third party administrator’s company.

As a Plan Fiduciary, one has a great amount of responsibility to the plan participants. By obtaining and reviewing the SAS 70 report, the Plan Fiduciary is performing one important aspect of his or her duties. The report will be able to give the Plan Fiduciary the ability to decide that the plan is in good hands with their third party administrator and that nothing is being overlooked. It is also a useful tool in determining if additional controls need to be put into place at the Plan Sponsor level to compensate for controls that may not be functioning correctly or are not in place at the third party administrator level. The Plan Fiduciary must remember that they are ultimately responsible for any issues that may arise concerning the plan and plan participants if their money is not adequately protected. 

Please take a moment to request a SAS 70 report from your third party administrator or review the yearly SAS 70 report that you may have already received and gain an understanding of the controls in place to protect your plan participants.

Shelby Williams

In this discussion, I want to address the general options that your TPA’s website offers you as a Plan Administrator. The following list is a listing of recommended actions that are discussed in our other posts.

Recommended Options

• Understand your fiduciary responsibilities
• Create a 401k plan committee, and a related charter to govern the committee
• Create an Investment Policy Statement (IPS)
• Conduct an annual or semi-annual meeting to discuss 401k yearly results
• Monitor you plan’s investments and add/delete investments as necessary
• Meet with investment advisers to discuss investment performance
• Review your TPA’s SAS 70 reports
• Review the yearly and quarterly financial statements provided by your TPA
• Promote your plan and educate your participants
• Have a current Summary Plan Description (SPD) on file and available to participants
• Understand and monitor the fees you pay to your TPA

If you are a Plan administrator and are responsible for your company’s 401k plan, you may have received some suggestions from your independent auditor or from an investment advisor similar to the recommended actions above.  Furthermore, if you are fairly new to the responsibilities to the administration of your company’s plan, you may not know how or where to find the answers to the above issues.

The good news is that if you currently have a TPA assisting your plan for recordkeeping and/or custodial purposes, then you most likely also have access to their website.  You have probably used their website to communicate participant contributions each pay period, and to authorize/initiate participant distributions. What you may not have noticed, is that your TPA’s website also offers guidance and tools to educate and implement solutions to the recommended actions below.  Many TPA websites have sections titled “Fiduciary News and Updates”, “Compliance”, and “Fiduciary Resources”.  All you need to do is explore the different sections and educate yourself on the available resources.  Alternatively, it is sometimes easier to call your TPA contact, communicate what information you are looking for, and they can help guide you through the website resources.  The most proactive approach is to schedule for your TPA representative to come to your office to give a presentation on the available website resources, and walk you through accessing certain sections.   Some key resources commonly offered by TPA websites are as follows:

Common TPA website resources

• Fiduciary handbooks
• Example Investment Policy Statements
• SAS 70 reports
• Quarterly and/or yearly contributi0n, distribution and forfeiture reports
• Quarterly and/or yearly financial statement reports
• Resources and action plans to promote and increase plan participation
• Summary Plan Descriptions (in different languages)
• Reports that compare your plan’s results and demographics to similar plans
• Plan fee statements and guidance on how to read and understand the fees
• General investment advice and how to monitor fund performance
• To-Do Lists, which notifies you of routine required administrator actions
• Recent investment market information
• Recent accounting and auditing issues that affect your plan’s financial statements
• Recent IRS regulations that affect your plan

Note: These are common resources offered by TPA websites, and not all resources are offered by all TPA’s.

Victor Fuentes

When selecting a TPA, the DOL recommends sponsors look at a number of providers. Consider their fees, communicate all expectations to them, obtain a fidelity bond, and review their SAS No. 70 report.

Monitoring a TPA includes reviewing their performance, all provided reports, and fees charged for services. It also includes inquiring of and understanding their policies and practices, as well as following up on any participant complaints.

The AICPA has published a guide to monitoring your TPA. In that guide, they recommend that employers establish and follow formal reviews at reasonable intervals in order to evaluate TPA performance.

An effective monitoring process with not only allow an employer to continue to keep their fiduciary responsibilities, but it will also give them an opportunity to monitor company expenses and improve participant satisfaction in the plan.

For more information of TPA monitoring, please follow the link above to the guide previously mentioned.

Jessica Puckett, CPA, CFE

Once your Plan Committee believes they have found a list of TPAs that will fill the needs of your specific Company, the Plan Committee must also address some additional items. The following is a list of items the DOL believes is important to consider when selecting a new TPA:

• Information about the firm itself – Financial condition and experience with other retirement plans of similar size and complexity
• Information about the quality of the firm’s services – The identity, experience, and qualifications of professionals who will be handling the plan’s account; any recent litigation or enforcement action that has been taken against the firm; and the firm’s experience or performance record
• A description of business practices – How plan assets will be invested if the firm will manage plan investments or how participants investment directions will be handled; the proposed fee structure; and whether the firm has fiduciary liability insurance

One helpful tool that a Plan Committee can request from the TPA is a copy of their SAS 70 report. This report is an in depth description of the TPA’s control objectives and activities and will give the Plan Committee an idea of how well the Company is implementing those controls.

Selecting a TPA is an important fiduciary duty of the Plan Sponsor. By taking the time to select a TPA that fits the Company’s needs, the Plan Committee can present a Plan to its participants that they feel confident is in line with the goals of the Company.

Shelby Williams