Monthly Archives: August 2011

Kathleen Koster of Employee Benefit News wrote the following piece:

 In a recent news briefing, a former Department of Labor official hinted that employers still struggling to comply with 415 rules outlined for 403(b) plans under the Pension Protection Act of 2006 may have played out the last of the agency’s leniency regarding enforcement.

Brad Campbell, former head of the Employee Benefits Security Administration, told attendees at the Washington, DC meeting presented by the Hartford that plan sponsors don’t have “a whole lot longer to get our acts together before the enforcement starts becoming more pointed.”

The first thing a 403(b) plan sponsor must do is determine whether they are protected under safe harbor or are subject to ERISA. Government plans are subject to ERISA, while plans sponsored by religious organizations may elect whether 403(b) applies. Charter schools or charitable organizations can usually fan under safe harbor – if the employer doesn’t contribute to the plan. If the employer contributes, however, it’s an ERISA plan. For employers that provide 403(b) contributions, they must file a Form 5500 and will be audited if the plan has a certain number of participants.

For fiduciaries that have the choice, Campbell recommends option not to be covered by ERISA. Still, he adds that sponsors should apply the rules to their plan just so they are following best practices.

Sidebar from article in HR Magazine, published by the Society for Human Resource Management (SHRM).

Automatic plan features help passively enrolled participants, but actively engaged employees save more for retirement, according to 2011 research by Mercer, a provider of benefits administration outsourcing.

Overall, participants who were automatically enrolled in their defined contribution plan and participated in an automatic salary deferral increase program had a 25 percent higher contribution rate than those who were automatically enrolled in the plan but did not receive automatic deferral increases.

Conversely, however, those who self-enrolled in the plan and did  not receive automatic deferral increases saved at a higher rate than those who self-enrolled and did receive automatic deferral increaes.

Mercer’s analysis is based on the behavior of 1.2 million participants for whom Mercer administers DC plans as of Dec. 31, 2010. 

“Clearly, it is important for plan sponsors to understand the difference in behavior and engagement between self-enrolled and automatically enrolled participants,” said Dave Tolve, U.S. retirement business leader for Mercer’s outsourcing business. “Those who self-enroll and set their own contribution rate are contributing nearly two and half times those who are automatically enrolled. While automatic enrollment obviously increases overall plan participation, it does little to overcome the inertia of unengaged employees.”

While further enhancing defined contribution plans with automatic increase features does drive increased savings, Tolve pointed out, “there is no comparison to the contribution and account values of actively engaged participants who consciously make retirement savings decisions.”

Defined Contribution Institutional Investment Association (DCIIA) recently did a study to analyze the various forms of leakage on a 401(k) plan.  Here is an excerpt from the introduction:

“When it comes to American workers’ retirement income adequacy, considerable emphasis has been placed on successfully enrolling eligible employees in their 401(k) plans at robust levels—and rightly so: you need savings to create retirement income. Nonetheless, saving in the plan isn’t enough; participants must also maintain their balances for retirement and avoid dipping into them beforehand. Indeed, a May 2011 Employee Benefit Research Institute (EBRI) Policy Forum analysis finds that various forms of plan leakage such as withdrawals and cashouts can have a significant impact, potentially resulting in double-digit reductions in retirement income adequacy over the full career of a plan participant.”

Click here to read the full Plug the Drain whitepaper.

Recent Bloomberg article by Margaret Collins:

U.S. investors who sold equities in their retirement accounts during market volatility in 2008 and 2009 did worse than those who stayed in stocks, Fidelity Investments said.

Participants in 401(k) savings plans who dumped stocks from Oct. 1, 2008, to March 31, 2009, when the Standard & Poor’s 500 Index fell 31 percent, and hadn’t returned to equities as of June 30, 2011, had an average account balance increase of 2 percent, according to the study released today. Those who maintained some equity allocation during that period saw their balances rise 50 percent on average.

Read full article here.

Workforce Management covered a study earlier this year that revealed women are hesitant about investing for retirement. “Uncertainty among women stems largely from a lack of knowledge about financial products and services, resulting in investments that may be too conservative to outpace inflation. ” For the full article, click here.

Fidelity Investments’ latest study  shows that employees who invest in Health Savings Account programs offered by their employer tend to contribute more to their 401(k) retirement savings programs. For the full story, visit Employee Benefit News.

Families who save their retirement funds in high-fee accounts could end up with one-quarter less money in retirement than those saving in low-fee accounts, according to the Congressional Research Service.

Investigations by the Congressional Research Service found that fees of 2 percent or higher are not uncommon in retirement plans. For couples who save their entire lifetime, the CRS study found that an annual fee of 2 percent rather than a more reasonable 0.4 percent could reduce savings by nearly $130,000.

Employers who sponsor retirement plans have a fiduciary duty to assess plan fees not only when you first hire investment consultants, money managers and other providers, but again every few years. But do you really know what you’re paying, let alone if the assessment is fair? Here’s a rundown of typical fees.

Investment management fees are typically the largest portions — often 70 to 80 percent — of total plan costs. Generally calculated as a percentage of assets invested, these fees are deducted directly from investment returns, and are not specifically identified on investment statements. Investment products that require significant management, research and monitoring services usually will have higher fees — which may or may not mean better performance. These fees are the most manageable and predictable costs to reduce, as employers typically have a number of funds to select from that meet their 401(k) plan needs.

Plan administration fees involve expenses for basic functions such as record keeping, accounting, legal and trustee services. The plan also may offer investment advice, customer support systems, and electronic access to plan information, online transactions or other services. Administrative costs may be covered by investment management fees and deducted directly from returns. When billed separately, you may cover them or they may be charged against plan assets. For a plan with individual accounts, fees are either allocated among individual accounts on a pro rata basis, or charged as a flat fee against each participant’s account.

Individual service fees are associated with optional features offered under an individual account plan. Fees are charged separately to the accounts of those who choose to take advantage of a particular plan feature, such as a loan from their account assets.

Revenue sharing. While “hard dollar” fees charged by providers are detailed in service agreements, many more fees go undisclosed. With few exceptions, mutual fund families pay marketing agents and administrators money—referred to as “revenue sharing”—for using their funds as investment options. Paid out of plan assets, these fees total as much as $1.5 billion annually. Despite the recent publicity about hidden fee arrangements, revenue sharing remains an entrenched if questionable practice. It’s legally permitted if disclosed, but often it’s not and nondisclosure is rarely enforced. Revenue sharing mostly affects small and mid-sized plans serviced by bundled providers. Large plans have the size and expertise to negotiate low fees, but small plans pay a higher percentage of assets in fees.

What Can You Do?

Try a fee audit. These audits are in-depth investigations that aim to uncover any hidden fees, determine a plan’s total costs and, if possible, negotiate waived or reduced costs going forward. While audits don’t necessarily lead to recovered funds, plan sponsors that undertake them at least find out if they’re being overcharged.

Experts advise plan sponsors to hire a fee-only, non-commissioned professional who has no other interest in the plan. Consultants stress the importance of asking the right questions — and knowing if you receive straight answers. Few service providers volunteer revenue-sharing data. Some will provide it when asked, and up to a certain point. If they refuse to provide the information you need, use publicly disclosed amounts in your calculations—and note the lack of cooperation from the vendor(s).

Armed with information about the true costs of their plans, you can often negotiate lower fees and/or additional services. Experts advise that no plan should pay more than 1.5 percent of assets, inclusive of everything. If negotiations don’t work, it may be time to shop for a new vendor. 

Source: http://www.smartspublishing.com/dart/ebr_dart/ebr_1108/ebr_1108_art2.html 

At the AICPA National Conference on Employee Benefit Plans in Las Vegas earlier this year, presenters Jeffrey Hinman and Lisa McCargar discussed what 401(k) auditors should be doing to address the risk of fraud in the retirement plans. Here are some of the things they mentioned that your auditor should be doing to mitigate the risk of fraud: 

•  Establish expectations and evaluate business reasons for unusual transactions
• Examine journal entries and other adjustments for evidence of fraud
• Insist on validating transactions, such a benefit payments
• Review accounting estimates for intentional bias
• Send participant confirmations
• Review personnel and payroll files
• Read the Plan document
• Review arrangements with third parties. Are there SAS 70 (SSAE16) reports available?
• Ensure that benefit payments are made to plan participants; test eligibility for benefit payments
• Consider confirmation of benefit payments, especially if distributions appear large or unusual
• Review account activity for participants who have access to plan assets or for administering plan

The AICPA’s Employee Benefit Plan Audit Quality Center recently sent out an announcement that we’d like to share with you: 

The Financial Accounting Standards Board (FASB) recently approved a revised accounting standard intended to provide more information about an employer’s financial obligations to multiemployer pension plans. The revised standard, which the FASB expects to finalize in September 2011, will require enhanced disclosures by employers participating in multiemployer pension plans, including:

• The amount of employer contributions made to each significant plan and to all plans in the aggregate.
• An indication of whether the employer’s contributions represent more than 5 percent of total contributions to the plan.
• An indication of which plans, if any, are subject to a funding improvement plan.
• The expiration date(s) of collective bargaining agreement(s) and any minimum funding arrangements.
• The most recent certified funded status of the plan, as determined by the plan’s so-called “zone status,” which is required by the Pension Protection Act of 2006. If the zone status is not available, an employer will be required to disclose whether the plans is:
• Less than 65 percent funded
• Between 65 percent and 80 percent funded
• Greater than 80 percent funded

A description of the nature and effect of any changes affecting comparability for each period in which a statement of income is presented.

Additional narrative disclosures will be required, as well as certain disclosures for employers with individually material plans that do not have plan level information that is publicly available comparable to the plan level information included in an U.S. Form 5500.

As a result of the comments received on the proposal, FASB deleted a proposal to require employers to disclose their withdrawal liability to all plans in which they participate, or provide a “point-in-time” estimate of its obligations with respect to the underfunded status of individual plans.

For public entities, the enhanced disclosures will be required in fiscal years ending after December 15, 2011. For nonpublic entities, the enhanced disclosures will be required in fiscal years ending after December 15, 2012.

Click here to read the FASB news release in its entirety. Further discussion is also available by clicking on this link to a related FASB Action Alert.

I recently attended the AICPA National Conference on Employee Benefit Plans in Las Vegas and I wanted to share some of the takeaways from a session on fraud in 401(k) plans. The presenters, Jeffrey Hinman and Lisa McCargar, shared some of their fraud war stories. Here are the highlights of the things to be aware of:   

CONDITIONS FOR FRAUD AND TYPES OF FRAUD

• Concealment
• Lies
• Misrepresentations
• False Statements

One of the three elements of the Fraud Triangle is usually present when fraud exists – opportunity, pressure/incentive, and rationalization/attitude.

FRAUD SCHEMES AND EXAMPLES

Some warning signs of fraud schemes:

• Individual account statement is consistently late or comes at irregular intervals
• Participants complain that account balance does not appear to be accurate
• Notice that employer failed to transmit contribution to the plan on a timely basis
• A significant drop in account balance that cannot be explained by normal market ups and downs
• Individual account statement shows contribution from paycheck was not made
• Investments listed on statement are not what participant authorized
• Former employees are having trouble getting their benefits paid on time or in the correct amounts
• Unusual transactions, such as a loan to the employer, a corporate officer, or one of the plan trustees
• Frequent and unexplained changes in investment managers or consultants
• Employer has recently experienced severe financial difficulty

Types of Fraud Schemes:

• Theft of Contributions or Wages
• Failure to Pay Employer Contributions
• Theft by Company or Plan Employees
• Multiple Employer Welfare Arrangements (MEWAs)
• Investment Fraud
• Benefit Payment Schemes
• Accountants Gone Bad