If the DOL Comes Knocking, Will You Be Ready?
"Knock, knock." "Who’s there?" "It’s the U.S. Department of Labor!"
If you are a retirement plan sponsor, fiduciary, or trustee and you are greeted with those words, you have a right to be nervous. Why? When the Employee Benefits Security Administration (EBSA)—the Department of Labor (DOL) agency that enforces pension plan regulations—chooses to examine your company's retirement plan, it will look exhaustively for fiduciary and administrative deficiencies that, if uncovered, could result in hefty fines and penalties for your company. Let’s take a look at why your company's retirement plan may be targeted for an audit, what happens if your plan is chosen to be audited, the potential consequences you'll face if errors are found, and ways to ensure that you are prepared.
What Information Will the DOL Review During an Audit?
If the DOL selects your plan to audit, it will notify the trustee(s) of your company's plan via an engagement letter. In the engagement letter, the DOL investigator handling the audit will request a comprehensive list of plan- and participant-related documents, including (but not limited to):
- Plan document and related amendments
- IRS Form 5500 for the plan year being audited
- Most recent summary plan description (SPD)
- Most recent summary annual report (SAR)
- Copy of distribution, loan, and other transactional forms for a specified time range
- Census of the plan participants, including highly compensated employees (HCE)
- Trust statements
- Schedule of plan assets for a specified time range
- Sample employee benefit statements
- All pertinent documents related to fees, including mandatory fee disclosures
- Service provider contracts
- Forfeiture account statements and history
- Nondiscrimination testing results for a specified period
- Copy of the plan's fidelity bond
- List of the plan's investments and investment performance
- Plan's investment policy statement (IPS)
- Plan or investment committee notes and minutes, including documentation related to the selection, retention, or removal of plan investments
Once DOL investigators receive these documents, they will review them with a fine-toothed comb, focusing on several key areas, including (but not limited to):
- Timeliness of depositing employee contributions
- Demonstration of a clear and prudent process for selecting and removing plan investments
- Applying the correct definition of employee-eligible compensation
- Adhering to the terms of the plan documents
- Reasonableness of fees, and a demonstration that service provider fees have been examined
- Timeliness of transactional processing, such as distribution and loan requests
- Accurate reporting on Form 5500, SPD, and SAR
- Adequate bonding
- Treatment of missing or terminated participants
What Are the Ramifications If the DOL Finds Something Wrong?
If it is determined that there have been missteps, the DOL will likely impose fines or penalties upon your plan. The fines will be payable by your company. Depending on the nature and egregiousness of the violation(s), those penalties could range from a few hundred dollars to several thousands. Last year, EBSA recovered more than $2.5 billion in enforcement actions alone, according to a 2019 fact sheet.
Perhaps you're wondering how likely your plan is to be audited. The DOL audits several thousand employee benefit plans per year. Although some audits are random, in most instances, the DOL engages in an audit if it notices something unusual on an annual filing (such as Form 5500) that raises a red flag, a required filing is late (or not submitted at all), or an employee (or former employee) logs a complaint.
Preparation Is the Key
What if you suddenly found yourself faced with an audit from the DOL? Would you be able to furnish the investigator with the lengthy list of documents and items included here? Could you confidently claim to have a grasp on the terms of your plan’s document, have applied a documented investment selection and monitoring process, and have recorded a 100 percent on-time record for remitting employee contributions?
If you're unsure how your company's retirement plan would hold up under DOL scrutiny, or if a visit from a DOL investigator would have you shaking in your shoes, perhaps it's time to "DOL-proof" your retirement plan. Here are a few ideas to get you started:
- Organize a fiduciary file, which is a hard copy or virtual depository that stores all of your plan's important documentation.
- Stress-test your plan by conducting a mock audit of your retirement plan, uncovering potential blind spots. Your plan's service providers, such as a third-party administrator or retirement plan consultant, can help you line up the needed documents (they may even electronically store some key documents on your company's behalf).
- For those who need a refresher on the role of a fiduciary, the DOL has published Meeting Your Fiduciary Responsibilities to educate retirement plan sponsors, fiduciaries, and administrators on the critical functions they need to perform when offering a workplace retirement plan.
Going through these exercises and enhancing your retirement plan organization framework will put your company's plan in a good state of health. That way, if the DOL knocks on your door, you’ll be prepared.