Aronson conducted its first employee benefit plan benchmarking survey in 2015. The survey provided a wealth of information on plans from companies located primarily in the DC Metro region. Respondents shared some very useful information regarding their employee benefit plan management strategies:
“Who is in charge of the plan?”
When we asked respondents this question, we were pleased to see that 76% noted that senior members of management were in charge of the plan. The plan sponsor is ultimately responsible for the administration of the plan, compliance with the applicable provisions of the IRS and Department of Labor (DOL), and fiduciary responsibility over the investments within the plan.
Administration of the Plan
In Aronson’s experience, although senior management is ultimately responsible for the plan, the actual administration of the plan is passed down to a lower level staff member. Problems may occur when the staff member responsible for the day-to-day administration of the plan is not involved in the decision making surrounding the provisions of the plan. Typically, members of management set the plan’s key provisions: who is eligible to contribute, whether or not participants must be employed at year end to receive employer funds, types of compensation eligible for calculation of employee and employer contributions, etc. The plan document, which can be a collection of documents (e.g., adoption agreement and corresponding basic plan document, summary plan description and loan policy), is the agreement that stipulates the provisions of the plan.
A thorough review of the plan document to determine it properly reflects management’s intentions is critical. This is particularly important when the plan is adopting a new provider’s document to ensure that the only changes to plan provisions are changes management intends. We also encourage a review when there is a “simple” restatement with the same provider. This occurs when the provider’s documents have been updated for new IRS regulations without changing the plan’s basic provisions. There could be clarifying language added to previously unclear provisions that must be reviewed to ensure the plan document continues to be a reflection of management’s intent.
In addition to ensuring the plan document reflects management’s intentions, you must be sure the staff responsible for the day-to-day administration of the plan is aware of these objectives and has a deep understanding of the provisions of the Plan document. Often these individuals may not have been included in the discussion and decision making stage or have access to the plan document. This may lead to them handling situations in direct opposition of the plan document and management’s intent. In addition, when there is employee turnover in the administration position, management must be sure the new individual(s) fully understand how the plan is to be administered. While never intentional, errors are not uncommon when individuals responsible for performing the day to day administration of the plan are not properly supervised.
Remember, as the plan sponsor, you have ultimate responsibility for the plan, even when many of the administrative duties for the plan are outsourced to another employee or third party administrator. Following these best practices can help you avoid costly IRS and DOL penalties down the line, while ensuring your plan is administered as management intended.
For more information on benefit plan administration, please contact Aronson’s Employee Benefit Plan Services Group at 301.231.6200.
Employee Stock Ownership Plans (ESOPs) are increasingly becoming a target for review by the Department of Labor (DOL) due to the additional degree of difficulty and complex structure associated with these benefit plans. Aronson recently attended the annual conference for the National Center for Employee Ownership (NCEO) which confirmed one of the significant areas drawing attention from the DOL, and others, is the valuation of employer securities that are not publically traded. There is an increased focus when this valuation is related to a significant stock transaction.
It is the responsibility of the ESOP Trustee, either internal or external, to determine the fair value of the privately held company stock in an ESOP. ESOP Trustees have fiduciary responsibilities to the plan, as they are making investment decisions on behalf of participants, for which they can be held personally liable.
To determine the fair value of privately held company stock, the ESOP Trustees will typically hire an independent valuation company. The valuation company gathers information from plan sponsor management via interviews, projections and analysis to determine the fair value of the employer stock. The value of the stock may be determined using multiple methods carrying various weights based on the specific circumstances of the employer. This valuation is presented to the ESOP Trustees for review and approval. It is important to note that, although an independent valuation company calculates the fair value, it is the ESOP Trustees who have the ultimate responsibility to accept the fair value, thereby determining the fair value of the company stock on behalf of the participants in the ESOP.
Where the ESOP Trustees may be vulnerable in carrying out their fiduciary responsibility is a thorough examination of company projections used in the discounted cash flow method within the income approach to calculate the fair value of privately held stock. In June 2014 GreatBanc Trust Company settled with the DOL, resolving allegations the ESOP Trustee violated the Employee Retirement Income Security Act (ERISA) by allowing the ESOP to purchase stock for more than fair market value. This was due to the Trustee’s failure to adequately inquire into the use of unrealistic and aggressively optimistic projections of the company’s future earnings and profitability.
ESOP Trustees should perform a due diligence review over the forecasts prepared by company management to be used in calculating fair value of company stock. A good measure of these forecasts is past performance. Also, if the plan in question is long-standing, compare the forecasts from several years ago to actual results to determine how successful company management is at projecting future earnings.
As part of their settlement with the DOL, GreatBanc agreed to a set of policies and procedures (Process Requirements) that they must follow when they are acting as an ESOP Trustee to purchase or sell company securities not publically traded. These Process Requirements provide ESOP Trustees with insight into the DoL’s expectations of the Trustees’ responsibilities in determining the fair value of privately held company stock. Phyllis C. Borzi, Assistant Secretary of Labor for Employee Benefits Security, said, “Others in the industry would do well to take notice of the protections put in place by this agreement.”.
Although the DOL has not mandated the use of the Process Requirements, it is a best practice for ESOP Trustees to follow them. This is particularly true for valuations involving stock transactions, but it has implications to the annual valuation as well.
It is critical for ESOP Trustees to document their review, considerations, and conclusion of the valuation of company stock, including management projections. Do not be afraid to inquire and push back on unreasonable projections as there is a fiduciary responsibility to do so. After a thorough review of the valuation is performed, the conclusion may be there is adequate evidence to support the fair value calculated by the valuation company. Documentation of the review of the facts and circumstances in “real time” is key, as an investigation can occur several years after the determination of fair value for company stock has been taken.
For more information about your duties as an ESOP Trustee or plan sponsor, please contact Aronson’s Employee Benefit Plan Services Group at 301.231.6200.
The Department of Labor (DOL) recently formally released the results of their “audit the employee benefit plan auditor” campaign and the results were underwhelming, to say the least. Their report indicates that audit quality is actually getting worse, not better. While this is not shocking to the DOL, AICPA or many practitioners, including accounting firms, it has been shocking to the media and general public. The DOL and AICPA have indicated for several years that there is tremendous concern that benefit plan audits are not being performed in accordance with standards and they insist that employers should be very careful when hiring a plan auditor.
From an auditing perspective, benefit plan audits are very different from corporate audits, and the technical requirements resulting from the IRS Code and ERISA make them very unique. The DOL has long contended that accounting firms need to perform a certain number of engagements to truly be qualified to do the work.
The DOL reviewed 400 Form 5500 plan audits from tax year 2011 and found 39% had major deficiencies. The report indicated that this deficiency rate would put $653 billion and 22.5 million retirement plan participants at risk. Previous DOL reviews supported a deficiency rate closer to 33%. The increase is nothing short of alarming given the efforts by the plan audit community over the last several years to educate accountants and plan sponsors of the importance of a quality plan audit. The results showed a direct correlation between the number of audits performed and the deficiency rate. The deficiency rate for plan audits by firms that only performed one or two audits was 76%, and the rate declined as the number of audits performed by accounting firms increased.
It is easy for plan fiduciaries to fall into the trap of a low cost/low effort benefit plan audit. However, the costs associated with a rejected 5500 due to a deficient audit ($1,000/day) far exceed those associated with a quality plan audit – not to mention the cost of correcting years’ worth of plan operational defects that could have been caught early. Plan sponsors also fail to realize that the DOL has no authority to sanction accounting firms that perform poor quality audits, resulting in plan sponsors paying the price, not the auditor.
Aronson has been banging the “quality audit” drum for many years and our own experience supports the DOL’s finding. Our Employee Benefit Plan Services Group performs hundreds of plan audits each year, and we have found significant deficiencies in prior years’ audits performed by underqualified auditors.
The Department of Labor (DOL) is preparing to release the results of another audit quality study performed on audits of employee benefit plans.* Based on comments made publicly, the report will show that audit quality continues to decline and is particularly poor when the auditor does not have retirement plan audit experience. Hiring the plan auditor is a fiduciary function, and a common misconception among plan fiduciaries is that, if an audit is found to be deficient, the accounting firm that performed the work is somehow in trouble with the DOL. Surprisingly, this is not the case. A deficient audit can subject the plan sponsor, not the accounting firm, to significant fines and penalties as authorized by Title I of the Employee Retirement Income Security Act of 1974 (ERISA).
Furthermore, under ERISA, failure to properly select and monitor service providers, including qualified auditors, exposes the plan administrator to potential fiduciary violations and civil penalties. The only real recourse the DOL has against auditors is to report the accounting firm to their state licensing board.
The DOL has stated that one of the main reasons these audits are deficient is the auditors’ lack of training and knowledge in areas unique to employee benefit plans. Fiduciaries should understand the importance of prior experience when considering hiring a plan auditor for the first time or in deciding to continue with existing auditors. The American Institute of Certified Public Accountants issued a plan advisory, “The Importance of Hiring a Quality Auditor to Perform Your Employee Benefit Plan Audit.” This guide explains why your plan audit is important and provides excellent information on what factors to consider in evaluating different audit firms. It also provides an outline for developing a Request for Proposal (RFP).
The employee benefit plan audit season has begun. If you have not taken the time to evaluate the qualifications of your plan auditor, consider doing so now before it is too late!
For questions about benefit plan audits, please contact Aronson partner Kathryn Petrillo at 301.231.6233 or firstname.lastname@example.org.
*ERISA generally requires employee benefit plans with 100 or more participants to have an independent financial statement audit. The audit report must accompany the Form 5500 that is filed annually with the DOL.