An unprecedented downgrade of U.S. government debt and disappointing economic data in the U.S. and Europe have shaken investors and contributed to one of the most volatile periods in stock market history. Recurring concerns about the European sovereign debt crisis and uncertainties surrounding the U.S. debt downgrade have contributed to extreme market volatility and heightened risk aversion over the past several weeks.  However, we believe that current economic fundaments do not warrant fears of 2008-style downturn. In addition, the extreme market reaction to recent events offers an opportunity for long-term investors to add exposure to high quality equities selling at attractive valuations.

Although fixed income securities have benefited from their perceived "safe haven" status in a risk-averse environment, investors are accepting very low yields on long-term high quality bonds in return for that safety.  We believe that risk is currently mispriced and that equities offer more attractive risk-adjusted returns for long-term investors. Share prices in cyclical sectors such as industrials and financials have been hit particularly hard in the recent volatility and may be oversold.

The economy continues to face a number of headwinds amid struggling consumers, a mediocre housing market, and profound fiscal challenges at the federal state and local levels.  Although the current environment is not without risk, it is different than the massively overleveraged environment that existed in 2008. Banks have recapitalized, Wall Street and consumers have reduced their debt, the housing market has stabilized, and corporate balance sheets are vastly improved.  As a result, we believe that a "growth recession" characterized by low economic growth and persistent unemployment is more likely than an outright return to negative growth, or a so-called "double-dip" recession.

Although investors are understandably concerned about the markets and the economy, we believe that current fundamentals do not warrant some of the extreme risk aversion and we expect markets will return to normal conditions in the next 12 to 24 months.

The DOL is responsible for investigating and enforcing reporting and disclosure requirements of employee benefit plans.  In 2010 they conducted 3,112 investigations resulting in almost 75% of which had one or more violations.  Presently the DOL is adding hundreds of new investigators to its staff, meaning the number of investigations will increase.

If your company has an employee benefit plan, you may not be able to escape a visit from the DOL, but the following should assist you with a positive report should your company be audited?

1. Deposit Participant Contributions as Soon as Possible.

The DOL requires that participant contributions (including loan repayments) be deposited into the plan's trust on the earliest date that they can be reasonably segregated from the employer's general assets.  While it is the DOL's position that the "earliest date" is determined on a case-by-case basis, it is therefore not acceptable to rely on the maximum time permitted under the regulations (the 15th business day of the following month) because most companies have the ability to transfer funds electronically, and some can even effect the transfer from company assets the same day as the contributions are made. 

2. Make Sure Your Plan Has a Proper Fidelity Bond.

While a company often has a fiduciary policy covering officers and directors, too often it fails to provide the required Fidelity Bond which should be at least 10% of the amount of the plan assets (not less than $1,000, nor more than $500,000 for each plan covered). 

Form 5500 requires Plan Sponsors to state if there is a Fidelity Bond and the amount of such bond.  Should a Fidelity Bond not be in place, or the coverage is inadequate relative to the plan's assets, the Plan Sponsor can expect to hear from the DOL.  One good tip is to review the amount of the Plan's Fidelity Bond at least annually to ensure that the coverage is adequate.

3. Promptly Respond to Participants' Inquiries or Request for Information.

The DOL requires that specific plan related documents be provided to participants and their beneficiaries upon request.  These documents include the latest Summary Plan Description (SPD), latest Form 5500, Trust Agreement, and Adoption Agreement or Plan Document.  Upon receipt of a written request for any of these documents from a Participant or their Beneficiary, the Plan Administrator must provide the document(s) within 30 days of the date of the request.  Not providing copies of the requested documents within the required time frame may result in a penalty of up to $110 per day.

4. Distribute Regular, Accurate Participant Statements.

Plans are required to distribute regularly benefit statements to plan participants.  The requirement for Defined Contribution Plans is for statements to be provided quarterly if the plan allows participant investment direction, and at least annually if the plan does not allow for participant investment direction.  The requirement for Defined Benefit Plans is to provide participant statements at least once every three years.  It is important to note that a participant or their beneficiary may request a statement once during any 12 month period.

5. Ensure that Fees Charged by Plan Providers are Reasonable for Services Provided.

Form 5500 requires the disclosure of all service provider fees paid by the plan.  Excessive plan fees have become another top investigative issue for the DOL, and a careful review of Schedule C of the Form 5500 may identify potential red flags. 

DOL Regulations 408, (b), (2) which is scheduled to become effective in April of 2012, requires that the Plan Sponsor disclose to participants all fees and expenses paid from plan assets to plan service providers.  In most cases, this will be the first time that participants have seen fees and Plan Sponsors can count on a lot of queries as to the reasonableness of plan fees.

6. Respond Promptly to DOL Letters Requesting Information

Ignoring inquiries will do the opposite of making them go away.  It is critical that a thorough and timely response be made to an inquiry from the DOL.

Form 5500 is the primary source of information to trigger a DOL investigation.  Red flags surface for plans that have a significant percentage of assets in real estate, limited partnerships, non-cash contributions, loan defaults, low diversification ratios, unreasonable low investment rates of return, or an adverse accountant's opinion (for plan's requiring audits).

Additional sources of information that can trigger a DOL investigation include bankruptcy filings and media reports that a company is in financial trouble.  Unfortunately, plans sponsored by employers having severe financial problems are vulnerable to inappropriate behaviors, including delaying deposits of participant contributions, loans to the company, or other illegal activities.

 A recent survey of 392 bank branches in 21 states by the US Public Interest Research Group found that fewer than half fully disclosed savings and checking account fees to prospective customers, and that a quarter provided no fee information at all.  The federal Truth in Savings Act requires the disclosure of all account-related fees.  Don't sign up for a new bank account unless you fully understand all the charges.  If you switch to a new financial institution, check your first few statements to make sure you aren't charged unexpected fees.  And don't ignore future bank correspondence, which might include details about new fees.