We have been sharing this Dept. of Labor Audit letter for a couple years now, many advisors ask us, “What does this mean exactly? How would I use this to my advantage in prospect meetings?”  

We have decided to post this blog in hopes it gives you further insights into this actual plan audit scenario so you can better articulate your unique value and demonstrate how imperative it is for plan sponsors to have an intelligent 401k advisor working on their behalf.

The theme of this request from the DoL to the trustees is the result of an audit (Yes plan sponsors...they do actually happen…and could very likely happen to you!). In the course of the audit, the DoL indentified several ERISA violations and consequent failure to fulfill fiduciary obligations. One example is the plan sponsors withheld over $12,000 for 53 days. Employees' deductions were being held as general assets of the company and not properly remitted to Principle (the record keeper) additionally; employee deferrals did not match amounts remitted to Principle.

The Plan also failed to be consistent on providing quarterly statements and/or providing correct benefit statements for employees with self-directed accts. More importantly, there is no documentation provided on much of anything in relation to prudent standards a plan fiduciary must uphold. This includes proper benchmarking, reasons why Principle or any of the service providers on the plan were chosen and there was no ongoing due diligence any on them. 

In essence, this Plan fundamentally failed in their fiduciary responsibilities, which ranges from adequately monitoring; investment options, service providers, fees and commissions being paid out by the plan and issuing and archiving proper documentations. They also failed to maintain a proper fidelity bond mandated by ERISA.

A distinctive encounter then occurs with this Plan, which involves the $583,844 (there is no plan too small for the DoL to focus their attention on). The Plan, with a change in their "organizational structure" terminated some of their participants and moved them to a new plan also administered by Principle. The net assets moved to the new plan were $583,844. The DoL is stating there is no documentation to prove this move was done in compliance with ERISA standards and there is no way to prove that $583,844 was a fair value given all the chaos and violations listed previously, specifically all the improper handling of participant deferrals.

There is no way for us to know the extent or nature of fines assessed and what corrective actions were required of the plan sponsor. What is documented, however, is the DoL assessed more than $1 Billion in fines and penalties during their last fiscal year. The DoL also has publically announced that many audits are the result of participant inquiries or complaints!

Potentially, a lawsuit from the DoL or another third party was a result or the DoL assessed a civil penalty, which they have the right to do, on any fiduciary that breaches their responsibilities under ERISA. The penalty is equal to 20% of the "applicable recovery amount."

The DoL has the discretion to waive or reduce that penalty amount. Given the severity of violations in this letter, assumptions would be some sort of penalty was indeed enforced.

In the latest Epstein Financial newsletter there is an article discussing prohibitive transactions, a primary focus of DoL audits. I think it is fair to say, the plan sponsor that received this letter from the DoL in 2008 was engaged in a prohibitive transaction(s) and with forthcoming 408(b)(2) regulations, plans that are indentified as having engaged in a prohibitive transaction are subject to an excise tax ranging from 15% - 100% of the amount of funds involved!

The opportunities here for you as an advisor is to be aware of all current regulations and industry developments, then adapt your services accordingly. When you are trying to get in the door with a prospect, you need to articulate that your process or "Retirement Plan Solution" protects and functions 24/7 so these types of violations do not occur. Demonstrate to them that your methods and knowledge will ultimately bring successful retirement outcomes for BOTH plan sponsors and the participants!

Please contact The 401k Coach to learn more about our ERISA Plan Fiduciary Indemnification Kit and how you can help provide complete protection for ERISA plan fiduciaries.