If you’re fortunate, your plan will never have to endure the intense scrutiny of an investigation by the Employee Benefits Security Administration (EBSA), which is the Department of Labor (DOL) agency that oversees most kinds of retirement plans of private employers. How does the EBSA choose a target for investigation? What happens during an investigation? It’s worth learning about some of the likely triggers for plan investigations, and to prepare for it, just in case.
The purpose of an investigation is to enforce the Employment Retirement Income Security Act (ERISA, or the Act), which requires plan sponsors to fulfill certain fiduciary duties described in the Act, with a focus on employees’ rights. Among other things, plan fiduciaries must regularly provide employees timely information about the plan’s provisions and its investments; they must handle all contributions, including any employee deferral contributions, with the utmost diligence; and they must inform employees of their rights to appeal the denial of any plan benefit. (Note that, separately from the DOL, the IRS enforces the rules that qualify a plan to benefit from various Internal Revenue Code tax provisions.)
While EBSA will never disclose the exact impetus for a particular investigation, certain ERISA violations are well known to make a plan a more likely target. Employers that pay heed to the following issues publicized by the DOL, and that implement certain best practices to address these issues, will more readily avoid an investigation, or at least make an investigation less painful if it does occur.
What Does EBSA Investigate, Exactly?
Below is a list of issues that are typically reviewed during any ERISA plan investigation, conveniently listed on the EBSA webpage, at elaws – ERISA Fiduciary Advisor (dol.gov):
- Have you identified your plan fiduciaries, and are they clear about the extent of their fiduciary responsibilities?
- If participants make their own investment decisions, have you provided sufficient information for them to exercise control in making those decisions?
- Are you aware of the schedule to deposit participants’ contributions in the plan, and have you made sure it complies with the law?
- If you are hiring third-party service providers, have you looked at a number of providers, given each potential provider the same information, and considered whether the fees are reasonable for the services provided?
- Do you have adequate cyber security policies and procedures and are they followed?
- Have you documented the hiring process [of your plan service providers]?
- Are you prepared to monitor your plan’s service providers?
- Have you identified parties-in-interest to the plan and taken steps to monitor transactions with them?
- Are you aware of the major exemptions under ERISA that permit transactions with parties-in-interest, especially those key for plan operations (such as hiring service providers and making plan loans to participants)?
- Have you reviewed your plan document in light of current plan operations and made necessary updates? After amending the plan, have you provided participants with an updated Summary Plan Description or Summary of Material Modification?
- Do those individuals handling plan funds or other plan property have a fidelity bond?
Documentation of your answers to the above questions is the best preparation for an investigation. Keep in mind that it is you, the plan sponsor, who is investigated by EBSA, NOT the plan’s third-party administrator, investment advisor, or recordkeeper.
In view of this hard reality, the key to good plan administration by the employer is to keep records of all of the above facts, maintaining a regular plan committee meeting schedule with minutes duly taken, and keeping copies of every document and communication sent to the employer by a service provider.
An Ounce of Prevention–Best Practices to Reduce the Likelihood of Investigation
EBSA May Use 5500 Data to Select a Plan for Investigation
It is not exaggeration to say that the information and data reported in the Form 5500 may provide the EBSA a treasure trove of reasons to investigate a plan. As the plan’s annual informational tax return, Form 5500 is required to provide accurate data about the plan’s funding, its assets, the number of its participants, and several key compliance facts. Accuracy is also important because the Form 5500 is signed under penalty of perjury.
File the 5500 on Time!
The fastest way to invite the unwelcome attention of the EBSA is for a plan not to file a 5500 for the plan when it is due, or to file one that is incomplete (lacking a required financial audit, for example). In addition to incurring expensive penalties, late filing may put the plan on a short list for investigation. It is always worthwhile to file even if it is late, but then it’s a race against the clock to get a delinquent return filed before the EBSA issues a penalty notice. Who enjoys living that dangerously? File promptly and completely to be safe.
Get the ERISA Bond!
The 5500 reports whether or not the plan is covered by a fidelity bond, aka the ERISA bond, which insures the plan against fraud or dishonesty by anyone handling plan assets. The bond is required for all plans subject to ERISA, so having to put a checkmark in the “no” box automatically identifies the plan as violating ERISA; that simple violation may trigger an investigation.
An ERISA bond is not expensive, and may be purchased from a long list of government-approved insurance carriers and surety companies, which you can find at the following website: Surety Bonds – Circular 570 (treasury.gov). The bond must name the plan as an insured party, and at all times it must cover at least 10% of the value of plan assets, up to a maximum of $500,000, or $1,000,000 for plans that hold employer securities.
Note that an ERISA bond is not the same thing as fiduciary insurance, which insures fiduciaries, and in some cases the plan, against losses caused by breaches of fiduciary responsibilities. Fiduciary liability insurance is not required and does not satisfy the fidelity bonding required by ERISA.
Get Employee Deferrals to the Plan Quickly and Consistently!
The 5500 reports instances of an employer failing to deposit any plan contributions within the required time frame. For employee elective deferrals, being late means transmitting the plan deposits beyond the usual timeframe established by each particular employer. For example, if your company usually transmits deferral deposits to the plan on the same day as pay day, then any transmittals you send after pay day are considered late under ERISA. These late deposits, however inadvertent, are characterized under ERISA as prohibited loans by the plan to the employer, subjecting the employer to report and pay excise taxes.
The issue of timeliness of deferral deposits is low hanging fruit for the EBSA investigator because it’s easy for them to verify. In a typical investigation, your transmittal and deposit records are likely to be requested for at least the current year and the prior two plan years. The investigator will note the time lapse between pay day and plan deposits for all payroll periods, and any late deposits will be easily identified as ERISA violations.
It makes sense to prepare for a possible investigation by conducting a self-audit of deferral deposits to identify any inconsistencies in the transmittal timing. How long after pay day does your company send elective deferrals to the plan? Does that time lapse vary a lot from pay period to pay period, or is it reasonably brief and consistent?
The DOL Employee Hotline May Prompt an Investigation
Aside from the 5500 reporting, a general point of vulnerability for a plan may be the participants themselves. A disgruntled plan participant may simply pick up the phone and call the DOL’s participant hotline, which is provided in every summary plan description, to report any complaint to the agency. The DOL prides itself on a 100% response rate to these calls, so whether large or small, a complaint is going to be addressed.
The bottom line here is to be sure that employees receive required notices and plan information on time, and that they have a means within the company to address their concerns, to help avoid the aggravation that can lead to a complaint to the ERISA hotline.
Hire ERISA Counsel to Defend You!
A DOL/EBSA investigation is not a social call. Even a friendly investigator is not your friend. An investigation is a consequential interaction with a government enforcement agency involving the potential imposition of expensive penalties and fines. An employer that feels confident that its plan is in great shape may be tempted to save on attorney’s fees by defending itself, unrepresented by counsel, and/or seek legal advice from a helpful TPA or investment advisor.
Such cost saving can easily backfire. TPAs and RIAs are not authorized to practice law, and would be much better utilized as referral sources to find a good ERISA attorney. An attorney can help the sponsor meet the challenge of narrowing the scope of the investigation as much as possible, and offer other effective strategies to minimize the significant economic impact of an investigation.
An investigation by the DOL is a demanding and unwelcome surprise for most plan sponsors. The blueprint for navigating the ordeal may be found in the compliance questions posed in the list above. If you minimize investigation triggers and chart your way to compliance in advance, using the best practices we describe, you are much more likely to weather an investigation unscathed.