PBTK Employee Benefit Plan Audits

From the 1950s through the early 1980s, the personal saving rate, determined in the flow of funds accounts, was above or near ten percent (U.S. Department of Commerce’s Bureau of Economic Analysis).  However, in the mid-1980s, the saving rate started to drop until it reached zero percent around the year 2000.  Then, a funny thing happened.  The recession hit in 2007 and Americans started saving again.  Not as much as before, but just over five percent of disposable personal income.  Some have said this increase was a necessary response to the shock felt by the recession and a new birth of financial responsibility.  Others have said it was just a delay in purchasing some necessities and needed higher-priced items, like autos.

Regardless of the reason for more saving, it couldn’t come at a better time as the nation’s Baby Boomer generation has started to retire.  Generally defined as Americans born in the years 1946 through 1964, the group encompasses approximately 80 million and the first Boomers reached age 65 last year.  Every day now more than 10,000 Boomers turn age 65; this will keep happening every day for another 18 years.

Even though Americans have started to save again, according to Somnath Basu’s article, The Anatomy of the Boomer Retirement Market (www.fa-mag.com), Boomers are “woefully under-prepared for retirement”.  Further, Somnath states, when referring to the first half of the Boomers, “this group of older boomers is totally clueless about what lies ahead after retirement.  They seem to have little or no understanding about the funds required to maintain their lifestyles . . .”

Part of the older Boomer’s confusion could be due to the ever-changing landscape of retirement plans.  For the first 20 years or so after passage of the Employee Retirement Income Security Act of 1974, traditional defined benefit pension plans were the norm.  Employers funded these programs and long term employees looked forward to enjoying a healthy monthly pension check.  Then the 401(k) plan started to take over.  Employers figured out quickly that they could save money by shifting retirement funding from themselves to their employees by getting rid of their traditional pension plans and start endorsing employee-funded defined contribution plans with a 401(k) salary deferral feature.

Congress has gotten into the act as well.  After initially cutting back the amount of salary that could be deferred into a 401(k) plan via the Tax Reform Act of 1986, cost-of-living adjustments have pushed the annual limit to $17,000, and those aged 50 or better can fund an additional “catch-up” contribution of $5,500 per year.

Despite the promise of Social Security benefits, it is now up to each American to save and fund as much of his retirement benefits as possible.  If the recession has a silver lining it’s the realignment of financial priorities including a focus on savings. But a five percent saving rate is not enough; let’s get back to the ten percent-plus glory days of yesterday.

Jay H. Beltz is PBTK’s Pension Plan Services Practice Leader. Jay is a pension consultant with more than 25 years designing, administering and consulting on tax-qualified retirement programs like defined benefit plans and Section 401(k) plans. He has been involved in establishing and terminating more than 5,000 plans and continues to advise all sizes of employers about the tax and savings benefit of such programs for their employee’s financial well-being.

If this is the first year your 401(k) plan has been large enough to require an audit, you might be wondering if you need a full scope or limited scope audit. These terms relate to whether or not you choose to have the plan’s investment information audited, not the audit services level performed by the auditors in other areas of the plan.

As a plan administrator, you can instruct your auditor to not perform any auditing procedures on investment information related to the plan, so long as the investment information has been certified by a bank or insurance carrier. These institutions must certify both the completeness and accuracy of the required information. It is up to the administrator to determine if the conditions have been met in order to allow a limited scope audit.

Since an auditor would not spend the time to test certified investment information, it naturally costs less to do a limited scope audit.  At Piercy Bowler Taylor & Kern, we will always recommend the least amount of services needed for a client, but sometimes a full scope audit is what is required or best for the plan. With the exception of testing investments and investment returns, we perform the same procedures on our full and limited scope audits.

A full scope audit includes plans with real estate investments, investments in brokerage accounts, and complicated investments. Our firm would audit the investment returns as well the investments. In this case, the cost of an audit is directly related to the time required to test the the investment information, which depends on the volume of investments.

It is ultimately the responsibility of the plan sponsor to decide if a limited scope audit is the right choice for their plan, given the complex nature of the investment environment. Contact us if you are not sure what choice is best for your employee benefit plan: a full scope audit or a limited scope audit.

Source: AICPA Employee Benefit Plan Audit Quality Center

After auditing 30 plus plans over the years and working with many experienced auditors on my team, it seems that our most successful jobs have one thing in common: the relationship with our plan sponsor/client is positive and we consistently communicate throughout the year, not just during the month or two prior to the audit deadline (July 31). I asked my current team of employee benefit plan auditors what elements made for a successful audit experience with their clients, and here are the responses that I heard again and again:

• The plan sponsor is organized
• The plan reports are reconciled on a regular basis
• The plan documents are updated throughout the year
• Their enrollment documents are current
• We are part of their team and are included on all communication related to their benefit plan
• The plan sponsor copies us on plan changes in the middle of the year, not just during the audit
• They think of us as a resource year round
• The plan sponsor stays updated and is current on regulations
• Changes to their business can impact the 401(k) plan and its participants – for example, they know to notify the auditors if the company is bought, sold or merges with another
• The auditors are included on decisions related to the plan; we are not notified after the fact when it is too late to utilize our expertise

Most, if not all of these points center on consistent communication throughout the year. When working with your employee benefit plan auditor, make them part of your team and copy them on emails related to your plan. Some of the information might not relate directly to the auditors, but some of it most definitely will. It gives us as auditors a head start on the plan audit each year, and lets us provide informed advice to better your plan. For information, or a free audit quote, please contact me today.

There is a key administrative deadline for defined contribution retirement plans in June to put on your calendar.  Please contact PBTK if you have any questions about these pending deadlines.

June Deadline:

• June 30: EACA Corrective Distributions

Contact us for information on preparing the tax and audit documents necessary for your 401(k) or defined contribution retirement plan at 702-384-1120.

A business law firm discusses a recent court decision involving plan fees and revenue sharing that all plan sponsors should be aware of:

Although investment policy statements are not required by the U.S. Employee Retirement Income Security Act (ERISA), it is highly recommended that every 401(k) plan have one. An investment policy statement (IPS) can protect the plan committee or other fiduciary responsible for investments by setting out procedures for fulfilling fiduciary responsibilities.

Although a good IPS can be a defense in a lawsuit asserting breaches of fiduciary responsibility, a recent court decision, Tussey v. ABB. Inc., reminds us that it is a double-edged sword-that is, there can be liability if you adopt an IPS but do not in practice follow it.

This case involved plan fees and particularly the way in which “revenue sharing” – the application of part of the expense ratio of plan investment funds to pay for record-keeping services – impacted other decisions made by the plan fiduciaries. Although the court made it clear that revenue sharing was not in itself an ERISA violation, the decision was premised on departures from the standards set out in the IPS. In this case, the departures occurred when fiduciaries agreed to overpay for record-keeping fees, selected the classes of fund shares made available to participants, and replaced one investment fund with another fund, motivated by the desire to increase revenue sharing. It also found the record-keeper liable for not applying the float on plan contributions for the benefit of the participants.

Click here to view the full article.

From Sandra Block, USA Today:

While millions of workers used money from their retirement savings to pay expenses during the Great Recession, African Americans and Hispanics dipped into their 401(k) plans at a much higher rate.

The rise in 401(k) withdrawals, loans and cash-outs among African Americans and Hispanics represents a major setback for their long-term retirement security, says Mellody Hobson, president of Ariel Investments, co-sponsor of a survey on the recession’s impact on retirement plans.

Even before the recession, African Americans and Hispanics had lower average balances in their 401(k) plans than whites and Asians.

Click here for the survey’s findings and the full article from USA Today.

A business owner may consider a Simplified Employee Pension IRA (SEP-IRA) for retirement planning purposes, but there are many advantages to placing funds in an individual 401(k) instead.  In general, the individual 401(k) plan has more options and flexibility for a sole proprietor, especially one who might be catching up after years of reinvesting funds into a business instead of putting money away for retirement.  Here is a summary of pros and cons you should consider before choosing either option:

1. In an individual 401(k) plan, salary deferrals can be made on the first 100 percent of compensation up to $17,000 in 2012.  An additional $5,500 can be deferred for those who have reached age 50 as a catch-up contribution.  SEP-IRAs don’t have catch-up contributions. The salary deferrals can be pre-tax, or they can be treated as Roth contributions, or split.
2. For all compensation levels under $200,000, a Section 401(k) plan will always permit higher contribution levels because of the salary deferral feature mentioned above.  Otherwise, both plans permit deductible employer contributions up to 25 percent of pay, not to exceed $50,000 for any one person (or $55,500 with the catch-up contribution).
3. An individual who is the trustee of his plan may invest plan monies in the broadest range of investments possible.  The SEP-IRA investments are limited as permitted by the IRA custodian.
   1. Self-directed IRAs may permit the same investments as the self-trusteed 401(k) plan but come with expensive fees, like setup and transaction charges, which can easily exceed the administration costs of an individual 401(k) plan.
   2. Form 5500-EZ does not need to be filed by a one-participant 401(k) plan until the total asset value exceeds $250,000; SEP-IRAs do not need to file Form 5500
4. The 401(k) plan allows participant loans up to $50,000.  Any borrowing from a SEP-IRA is treated as a taxable distribution subject to potential excise tax for early distribution.
5. Bankruptcy protection applies to both thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA); however, only qualified retirement plans under ERISA are shielded from other types of judgments, such as civil lawsuits.

Piercy Bowler Taylor & Kern has a Pension Plan Services practice to help entrepreneurs and business owners create and manage their tax-qualified retirement programs like the individual 401(k) plan. Contact us today at 702-384-1120 for more information.

Jay H. Beltz is PBTK’s Pension Plan Services Practice Leader. Jay is a pension consultant with more than 25 years designing, administering and consulting on tax-qualified retirement programs like defined benefit plans and Section 401(k) plans. He has been involved in establishing and terminating more than 5,000 plans and continues to advise all sizes of employers about the tax and savings benefit of such programs for their employee’s financial well-being.