Typically, only one in four retirement plans audited in the last few years has earned the federal government's seal of approval.
An estimated 70% of retirement plans audited by the Department of Labor (DOL) in 2009 and 2010 were fined, received penalties or had to make reimbursements for errors--all of which ending up costing plan fiduciaries about $450,000 per plan, according to the department. The size of the average fine indicates that the DOL is uncovering problems at larger plans.
In the past few years, the DOL's Employee Benefits Security Administration (EBSA) has redoubled its efforts to promote compliance among plan sponsors. In fiscal 2010, the EBSA collected $1.05 billion in plan restorations, fines and penalties from retirement plans, according to a newsletter published last year by Columbia Management Investment Advisors LLC.
The DOL expects that figure to keep rising. Last year, the agency added nearly 1,000 employees, most of them assigned to enforce compliance among plan sponsors. This means more 401(k) retirement plans will face scrutiny this year, and potentially hefty penalty costs if their plans are mismanaged by a retirement plan sponsor.
Kevin Watt, vice president at Security Benefit, a Topeka, Kan.-based retirement plan provider, says the size of the DOL's penalty pot does not surprise him. "Historically, there hasn't been a whole lot of government enforcement,'' he said. "But from our viewpoint, there's now a quickly changing regulatory landscape."
And with an expanded DOL enforcement staff, the chances of a retirement plan coming under audit increases and more small plans would likely be targeted.
Watt says it's essential for financial advisors to be well versed on DOL regulations covering 401(k) plans. "They basically have to be held accountable to those government standards in building that plan," Watt says. "At the end of it all, are these plans being established prudently? And are they adhering to the standards and rules set forth?"
According to the DOL, a majority of plan failures occur because plan sponsors fail to follow their plan document provisions; because they discriminate against rank-and-file employees; because they fail to meet minimum employee coverage requirements; or because they establish a plan for which their businesses do not qualify.
Plan sponsors also often fail to deposit participant contributions to the plans in a timely manner; they file their 5500 forms late or not at all; or they fail to ensure that participant loans comply with plan provisions.
Watt says retirement plan sponsors can avoid many of the problems typically discovered in an audit with continuous monitoring and by spotting and rectifying any errors with an IRS or DOL-sponsored correction program.
Other DOL Audit Findings:
During 2010, the DOL audited more than 3,100 plans and found that more than 73% of them were required to restore losses to the plan or take another type of action to correct plan deficiencies.
An estimated 96 individuals (e.g., plan officials, corporate officers and service providers) were indicted for offenses related to their plans.
From the audits, we can conclude that a very small percentage of plans have true "bad guy situations"; the majority of violations generally come from oversight, errors and omissions by plan sponsors.