Employee benefit plans with 100 or more participants are required to have an audit under the Employee Retirement Security Act (ERISA).  This is part of the employer's obligation to file the annual return/report (Form 5500). If you have just crossed the 100 participant threshold and need an audit for the first time, or are just curious to know if you are getting everything you should from your current plan auditor, this article will help you understand how to hire a quality auditing firm.

Before we look at the process, however, it is important to understand why the financial statement audit is important to your plan. The financial statements are a passage to evaluating how the plan is performing, including an assessment of the ability to pay present and future benefits. A financial statement audit not only helps assure that your financial statements are reliable, but also can also help management improve operations through evaluation and identification of weaknesses in internal control and errors\omissions (if any).

Hiring an auditor typically starts with a Request for Proposal (RFP). This is a letter that you will send out to audit firms, asking them to provide information that will allow you to make an informed hiring decision. Below are some important items to include in your RFP:

• Outline of the proposal and selection process
• Background of the firm and the individuals who will be providing the auditing service
• Objectives and expectations (be very specific here)
• Name of contact person at your organization
• Number of copies of the proposal
• Information about your organization
• Copies of most recent plan audit (if applicable), most recent 5500 with all attachments and a copy of the Summary Description
• Field work dates and expected completion date

Once you have received the proposals, take an organized approach to evaluating them so each one is consistently reviewed. This will help you save time and ensure you select the most qualified audit firm. It may help to have a checklist of minimum requirements when evaluating each proposal. Some items to focus on when reviewing the proposals include:

• Firm quality and experience
• Auditor qualifications and experience
• Make sure all of the requirements in your RFP were met and all questions were answered
• Verify that the audit firm is independent and does not have any financial interest in the plan or plan sponsor

One of the items that has been excluded from the list above is price. Although this is an important factor in evaluating proposals, it should not get in the way of choosing the most qualified audit firm. Take into consideration that price and quality do not always directly correlate and that technical criteria and qualifications should be the main deciding factor. 

Author: Sarina Johnson-Like CPA

507.453.5968

sjohnson-like@hawkinsashcpas.com

It is the responsibility of the plan sponsor to administer and monitor the company's plan.  The fiduciary is a person or group that performs this duty. The fiduciary acts solely in the interest of the participants and their beneficiaries. Here are some of the basic duties that the fiduciary is expected to perform.

1.  Have all relevant documents on hand and organized for management and external auditors. 

Some of the documents include:

• The Plan Document
• IRS Determination Letter
• Summary Plan Description
• The Investment Policy Statement approved by the board
• Corporate Board Resolutions
• Prior Years' Forms 5500
• Service Provider Contracts
• Fiduciary Liability Insurance Contract
• Nondiscrimination Test Results (yearly)
• Corporate Tax Returns.

These documents are the foundation of the plan and act as proof of the plans compliancy with laws and regulations.

2. The fiduciary acts as the conduit between the participant (employee) and the plan sponsor (the company).

It is important to keep all enrollment material that was signed by the participants, even if a participant does not want to contribute to the plan. This also includes distribution documents, participant complaints and correspondence with participants. A file should be kept of all changes to contributions made by the participants. This documentation is important in case any participants or former participants question how the plan sponsor treated their contributions or lack of contributions. Documentation is key to protect the plan and the employer from possible conflicts or misunderstandings that can cost time and money.

3. The fiduciary is in charge of the administration of the plan.  

Have copies of employer contributions, audit results, documentation of investment activity, executive summaries from Committee Meetings (board minutes), current fund selection, and expenses to the plan. Quarterly internal checks (internal audits) of the plan help identify weakness in controls of the plan and act as evidence that the plan sponsor is preforming their fiduciary responsibilities. Such checks can include, but are not limited to:

• Reviewing three to five participants' contributions, comparing documented deferral requests to actual participant deferrals.
• Reviewing requested distributions during the period. 
• Inspecting three to five participants' plan folders. This will help keep the plan sponsor's files up-to-date and accurate. 

These are examples of some of the responsibilities of the fiduciary. If you have additional questions, please contact Hawkins Ash CPAs. 

Author: Jeff Uhlir

920.684.2550

juhlir@hawkinsashcpas.com

Many individuals are involved in operating a qualified plan. Some are considered fiduciaries and others act under the direction of a fiduciary. This is an important distinction that all plan sponsors should understand. A couple of recent cases shed some light on who is and isn't a fiduciary.

Defining a Fiduciary

Under ERISA, a person is a qualified plan fiduciary to the extent that person:

1. Exercises any discretionary authority or discretionary control over management of the plan or exercises any authority or control over management or disposition of its assets,
2. Renders direct or indirect investment advice for a fee or other compensation with respect to any plan money or other property, or has any authority or responsibility to do so, or
3. Has any discretionary authority over or discretionary responsibility for the plan's administration.

Individuals who perform functions within guidelines established by the fiduciaries aren't considered plan fiduciaries themselves. Functions performed by nonfiduciaries might include maintaining participant employment records, explaining plan provisions to new participants, preparing plan reports, or processing claims.  

Financial Services Provider

In Leimkuehler v. American United Life Insurance Company, the 7th U.S. Circuit Court of Appeals had to decide whether a financial services provider was an ERISA fiduciary when it negotiated or received revenue sharing payments. The plaintiff (the plan trustee) sued the insurance company for breach of fiduciary duty, claiming that the company had control over the revenue sharing the company received from the mutual funds offered in the 401(k) plan and thus was a fiduciary.

Out of about 7,500 mutual funds on the market, the defendant's investment platform offered approximately 400 funds to its retirement plan customers. Each retirement plan sponsor, including the plaintiff, decided which of these 400 funds to offer to its employees. Participants then chose how to invest their individual dollars in the plan.

Both state insurance law and ERISA required the defendant to separate retirement contributions from other assets. Thus, the defendant deposited the participants' contributions into a separate account it owned and controlled. The defendant used the funds in the separate account to invest in the mutual funds selected by the plan participants and then it credited the investment proceeds back to the participants.

According to the court, "management or disposition of assets" under ERISA's first criterion for being a fiduciary doesn't include a separate requirement of discretionary authority or control. ERISA states that an entity is a fiduciary only "to the extent" it exercises its authority or control. The U.S. Supreme Court has interpreted this as requiring that an entity exercise authority or control with respect to the action at issue in the suit to be liable as a fiduciary.

Thus, in Leimkuehler, the defendant's control over the separate account would support a finding of fiduciary status only if the plaintiff's claims for breach of fiduciary duty arose from the defendant's handling of the separate account. However, the court found that the plaintiff couldn't show that the defendant had mismanaged the account.

The plaintiff also contended that the insurance company acted as fiduciary because it had the authority to delete or substitute any of the 400 funds on their platform. However, the fact that the plan sponsor was the one to select the roster of investments actually offered to the participants ultimately led to the court's decision that the defendant wasn't acting as a fiduciary, and thus the court found in the defendant's favor.

Company Officers

International Painters and Allied Trades Industry Pension Fund v. Clayton B. Obersheimer, Inc. addressed whether officers of a plan sponsor were plan fiduciaries. The plaintiffs were the pension fund and the fund's administrator. The fund covered participants whose employers contributed to the pension fund under labor agreements. The defendants were the officers of the collectively bargained companies whose employees were covered under the pension fund.

According to the plaintiffs, the defendants, in their roles as officers of the company, exercised control and authority over the contributions (plan assets) until they were properly remitted to the pension fund, and were, therefore, ERISA fiduciaries. Specifically, the plaintiffs argued that, by delaying payment of their mandatory contributions, the defendants exercised discretionary control over the plan assets and became plan fiduciaries.

Under ERISA, the Department of Labor (DOL) is responsible for defining plan assets. DOL regulations state that the Secretary of Labor may define plan assets in its regulations. While the regulations define certain types of plan assets, they don't contain a general definition of plan assets or define when employer contributions become plan assets. A number of cases have found that employer contributions aren't considered plan assets until after they've been paid, but the trust agreement governing the plan in International Painters stated that unpaid contributions were plan assets while still unpaid.  

However, the court ruled in the defendants' favor. None of the plan documents submitted by the plaintiffs specifically designated the officers as fiduciaries, and none of the defendants' actions demonstrated how the officers exercised discretionary authority or control over the plan assets. In addition, the court found that an employer isn't automatically a fiduciary when it breaches an agreement to make employer contributions.

Avoid Personal Liability

Plan fiduciaries must follow strict standards of conduct set forth in ERISA. While the courts ruled that the defendants in these cases were not acting as fiduciaries, it's important to remember that plan fiduciaries may be subject to personal liability for failure to meet ERISA standards.   

Sidebar: Named vs. De Facto Fiduciaries

Although most plans have multiple fiduciaries, every plan must have at least one. Plan documents can specifically name the plan's fiduciaries. A named fiduciary might be the employer sponsoring the plan or a committee composed of the company's officers. Named fiduciaries can also be outside service providers that manage the plan assets.

Express designation as a fiduciary isn't necessary if a person's actions establish "de facto" fiduciary status. For example, courts have found de facto fiduciary status when a third-party administrator exercised authority over the disposition and management of plan assets and when a person had power over plan withdrawals. However, an individual's status as an officer alone doesn't make that person an ERISA fiduciary.

Regardless of position, each person (or entity), acting in the capacity of plan fiduciary, has the ultimate responsibility for plan operation that is consistent with the best interests of each plan participant and beneficiary.

Contact: Randy Juedes

715.748.1346

rjuedes@hawkinsashcpas.com