Over the past year the country has experienced several large, once stable corporations either fail or file bankruptcy. Unemployment rates are at their highest in decades and many people refuse to look at their retirement funds due to major losses in the stock market In the current environment many individuals are looking for someone to blame for the country’s financial condition and there has been an increase in litigation against retirement plans by plan participants.
There has been a dramatic increase in the number of regulations issued in association with retirement plans – from compliance related initiatives to financial statement disclosure requirements. Retirement plans have been under increased scrutiny from the U.S. Department of Labor, the Internal Revenue Services and plan participants alike. This increased scrutiny has created a heightened awareness of retirement plan operations as well as an emphasis on specialization in the public accounting profession with respect to their plans and related audits. The focus has now shifted to the plan fiduciaries and their responsibilities to the retirement plans that they operate.
The DOL is a cabinet department of the United States government responsible for occupational safety, wage and hour standards, unemployment insurance benefits, re-employment services and economic statistics. The Employee Benefits Security Administration is the agency of the Department of Labor responsible for administering the provisions of the Employee Retirement Income Security Act of 1974. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by requiring disclosures related to the plan as well as establishing standards of conduct for plan fiduciaries.
It is important to understand who can serve in a fiduciary role to a retirement plan as well as understand the duties and responsibilities associated with this role. A fiduciary is an individual, corporation or association holding assets for another party, often with the legal authority and duty to make financial decisions on behalf of that party. The fiduciary duty is a legal relationship of confidence or trust between two or more parties, most commonly a fiduciary/trustee and a principal/beneficiary. In terms of retirement plans, a fiduciary is a person entrusted with the oversight and administration function of the plan by its participants. There is no standard title indicating whether or not a person is considered a fiduciary or trustee of the plan; rather fiduciary status is determined based on the functions performed for the plan.
The key to identifying a fiduciary is whether or not an individual or entity is a fiduciary, is if they are exercising decision making authority or control over the plan. The plan document must indicate at least one named fiduciary- a person, specific position, titled employee or a group of individuals such as a board of trustees or retirement committee. Plan fiduciaries have several responsibilities including maintaining operations in compliance with the plan document, monitoring investment policies and related changes in investment diversification, as well as reporting and filing requirements. Although the named fiduciary is responsible for many duties, they do not necessarily need to carryout the day to day operations of various functions. The fiduciary must act prudently and identify those areas in which they may not have the necessary resources or experience. For example, many fiduciaries are not particularly well versed in the area of investments – a major feature of any retirement plan. The fiduciary has the ability to hire a service provider with professional knowledge to assist in the fiduciary responsibilities of the plan. In addition, another party may act as the custodian and hold the actual assets of the retirement plan. Regardless of the parties involved, the fiduciary responsibilities are not absolved and the ultimate responsibility for the plan operating in compliance with the plan document rests with the named fiduciary.
According to the Department of Labor, more than 10,000 certified public accounting firms perform nearly 80,000 plan audits annually. In 2005, as part of the increased regulations associated with retirement plans, the Employee Benefit Security Administration began an enforcement initiative to monitor the quality of ERISA audits. This program was established because of reported abuses of retirement plan investments and lack of oversight on behalf of plan fiduciaries. Prior to this initiative, the DOL documented that ERISA audit deficiencies were occurring at an unacceptably high rate. In response to these findings, the EBSA implemented an inspection program that stratifies public accounting firms performing ERISA audits into five categories depending on the number of annual audits performed. The inspections range from a complete firm inspection to augmented work paper review.
The result of the inspection program is that the DOL has been able to compile a listing of common retirement plan deficiencies associated with plan audits by public accounting firms. Many of these deficiencies are recurring on engagements and could have been resolved through proper fiduciary plan oversight. The most common deficiencies are related to eligible plan compensation, timeliness of participant contributions, departure from investment policies, improper administrative expenses charged to the plan and lack of plan oversight by those charged with governance.
As with any service provider hired by the plan, the ultimate responsibility remains with
the plan fiduciary and can not be transferred to any third party—including the auditor. Many public accounting firms have developed dedicated audit teams with retirement plan specialization to provide the level of service required to ensure compliance with the rules and regulations in place.