How to prepare for Department of Labor benefit plan audits

The U.S. Department of Labor (DOL) has increased its compliance enforcement efforts and is expected to conduct more benefit plan audits to determine if the companies that sponsor them are meeting those requirements.

“This is an area of focus for the DOL. A lot of time was spent preparing fee disclosure regulations, and follow up is likely to ensure plan sponsors are using that information. An increase in audits hasn’t been announced, but more auditors are being added to the ranks,” says Andrea McLane, manager, Benefit Plan Services, at Rea & Associates.

Smart Business spoke with McLane about what the DOL expects of plan sponsors and how to meet those expectations.

Do fee disclosure regulations cover all benefit plans?

The primary area of concern is with retirement plans since so many accumulated assets and safeguards are needed to ensure the plans provide income to employees when they retire. The DOL is also looking at welfare plans to make sure those with 100 participants or more are filing Form 5500s.

But the emphasis in the fee disclosure regulations is on fiduciary or other compliance issues regarding retirement plans. The regulations were meant to simplify the explanation of fees so that plan sponsors, with assistance from consultants, can better understand fee structures and evaluate when services were necessary and fees were reasonable.

What can plan sponsors do to document that plan fees are reasonable?

There are two approaches that can be taken to help you meet fiduciary responsibilities:

  • Request for proposal (RFP).
  • Benchmarking.

You can issue an RFP every three to five years and compare the responses to current provider costs to determine whether fees are competitive. However, it’s difficult for the average plan sponsor to review RFPs because there’s no format for disclosures, making an apples-to-apples comparison challenging.

It’s much easier for plan sponsors to benchmark their fees. You can do this using data from your current service provider only. This method isn’t objective and is of a lower quality. It also may not meet fiduciary responsibilities when it comes to the process of choosing a provider. The best solution is to find a good, independent benchmarking service. While not a requirement, the DOL set an expectation that plan sponsors will benchmark and at least check the reasonableness of their fees.

An investment policy statement (IPS) can help you select and monitor plan investments. An IPS isn’t required, but it’s tough to monitor investments without one. It will also help ease DOL anxiety concerning the level of governance provided. Many investment advisers supply an IPS as part of their services.

Is a benchmarking report enough to satisfy plan sponsor fiduciary responsibilities?

It goes a long way, particularly regarding record keeping fees, but you still have to make sure you have proper oversight and aren’t relying too much on provider assurances. Most high-profile cases the DOL has undertaken have dealt with fees at the fund level. For example, Wal-Mart wasn’t using the best possible share class of funds in its plan — it was using retail-class funds. In this case, the retail giant relied on its trusted advisers too much and didn’t ask enough questions. An independent benchmarking report would have identified that fund fees were too high for a plan of such magnitude, giving Wal-Mart the opportunity to make changes.

Demonstrating that you have a process in place to monitor the investment decision-making of your plan should suffice. The DOL will not second-guess the success, or lack thereof, of the investment decisions within the plan. But it can identify when there is no documented process to monitor service providers, preventing you from meeting your fiduciary responsibility. Without documentation, the DOL will conclude de facto that the fees are unreasonable and the plan is not compliant, resulting in enforcement actions and penalties. It also leaves you open to participant lawsuits for breach of fiduciary duty.

Andrea McLane is manager, Benefit Plan Services at Rea & Associates. Reach her at (614) 889-8725 or [email protected].

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