Greenberg Traurig, LLP



GT Alert

Today’s Retirement Plan Environment Leaves Much for Concern

February 2004
By Jeffrey D. Mamorsky, Greenberg Traurig, New York Office

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As a result of corporate and accounting scandals, CEO abuses, mutual fund scandals and fiduciary litigation on the nondisclosure of insider trading and hidden expense loads, employees have lost confidence in their employer’s ability to provide for retirement benefits.

Jeffrey Mamorsky
"A November 12, 2002 New York Times front page article blames the demise of almost all the 150 pension plans that failed in the past year on the 'gaming' of pension assumptions by corporate plan sponsors and their actuarial consulting firms that have resulted in inadequate plan contributions."

Recent bad press and a multitude of pension plan failures have heightened these concerns. For example, a November 12, 2002 New York Times front page article blames the demise of almost all the 150 pension plans that failed in the past year on the “gaming” of pension assumptions by corporate plan sponsors and their actuarial consulting firms that have resulted in inadequate plan contributions.

To put it mildly, the retirement plan system in the U.S. is a mess! Congress has responded with the Sarbanes-Oxley Act (“SOX”) that requires a public company CEO, CFO or other responsible fiduciary to certify the establishment and adequacy of “disclosure controls and procedures” relating to material items in the annual financial report. What companies sometimes overlook is that this SOX Section 404 Management Assessment of the Adequacy of Internal Control Procedures requirement applies to pension and benefit expenses. This is an issue that cannot be overlooked since SOX includes draconian sanctions of $2 million and up to 10 years imprisonment for non-willful ($5 million/up to 20 years imprisonment for willful) certification of any statement that does not comply with SOX requirements.

SOX also applies to private companies since it adds new ERISA White Collar Criminal Penalty Provisions that impose sanctions on employer plan sponsors and plan fiduciaries for willful violations of ERISA’s financial statement and other reporting and disclosure requirements. This could occur in the case of a certified financial statement of a pension, 401(k) or other retirement plan where the auditor now requires employer plan sponsors to represent that the plan is operated pursuant to its terms and applicable law. This representation which appears as a footnote in every plan’s financial statement is likely to be inaccurate in the absence of the establishment of internal control procedures that enable the employer plan sponsor to identify inconsistencies between administration, plan provisions and IRS qualification requirements. The importance of this issue has been recently addressed by the AICPA with the issuance of “SAS No. 99-Consideration of Fraud in a Financial Statement Audit” that concludes that the lack of internal control procedures for establishing and monitoring an employer’s financial statement representations may result in a material representation and possibly fraud. In this regard, the AICPA recommends the engagement of a specialist to perform an independent review to ascertain the adequacy of internal control procedures.

Government agencies have also responded to this growing retirement plan crisis with programs that impose sanctions on employer plan sponsors for failure to operate 401(k)/retirement plans in accordance with ERISA/IRS qualification requirements and for failure to follow the terms of plan documents. For example, both the IRS and Department of Labor (“DOL”) have established audit programs that impose sanctions of up to 20% of the amount of plan assets for an even unintentional failure to administer a retirement plan in accordance with the documents and instruments governing the plan and the requirements of ERISA and the IRS. The problem is that most third party administrators (particularly the large mutual fund vendors) merely “process” plan information and do not monitor compliance with plan documents and legal requirements.

Requirement to Self-Audit and Correct ERISA and IRS Violations

Both the IRS and DOL have established programs that enable plan sponsor employers to mitigate (and in some cases eliminate) the imposition of sanctions on the employer. However, both the “IRS Employee Plans Compliance Resolution System” and the “DOL Voluntary Fiduciary Correction Program” are conditioned upon the establishment of self-audit internal control procedures that enable the employer fiduciaries to identify and correct IRS and ERISA violations before an audit by IRS or DOL.

However, although the IRS and DOL have taken great pains to encourage employers to self-audit and correct ERISA and IRS violations, there is a growing concern among congressional and agency leaders that very little (if anything) is being done.

As a result, the IRS recently issued an “IRS Retirement Plans Alert” emphasizing the importance of initiating an independent regular review and analysis of retirement plan documents and operation. Moreover, the IRS on October 1, 2003 established a New IRS Audit Initiative Targeting “Large” Retirement Plans (covering 2500 or more participants). It is different in size, scope and intensity than previous audits of qualified plans. The IRS Large Plan Audit Team consists of 6-8 Agents (including benefits and computer audit specialists, benefits attorney and actuary) with a typical large plan IRS Audit exam expected to last 200-300 staff days. 401(k) plans, cash balance plans, ESOP’s and other risk profilers are specifically targeted.

Failure to Disclose Plan Expenses

Another major concern that has been featured in the press is the failure to disclose retirement plan expenses to plan participants. The DOL considers this issue to be the responsibility of the employer plan fiduciary and has recently announced an aggressive DOL Plan Expense Audit Initiative that imposes personal liability on corporate executives for failure to monitor the reasonableness of plan expenses. For example, aggressive DOL enforcement of this ERISA fiduciary responsibility requirement resulted in a settlement of over $50 million for improper plan expenses and failure to prudently select and monitor plan service providers.

Increased Government and Participant Litigation

Finally, there is the risk of increased government and participant litigation. Public companies face the specter of Shareholder Derivative Lawsuits that could impose civil liability on corporate directors for failure to establish procedures for monitoring compliance that mitigate or eliminate corporate liability such as the IRS and DOL self-audit compliance programs that require corporations to identify and correct retirement plan violations in order to avoid the imposition of sanctions.

All companies (public and private) sponsoring retirement plans face the risk of DOL and participant lawsuits by class action plaintiff attorneys such as the “Pension Police” which could result in civil liability for ERISA breach of fiduciary duty for failure to monitor compliance with IRS and DOL requirements. Moreover, retirement plan fiduciaries face the risk of DOL litigation. For example, a recent ERISA breach of fiduciary action against Enron held that its officers and directors, members of the plans’ administrative committees, plans’ trustees and outside auditors could be personally liable for allowing plan losses due to investments in Enron stock. Another ERISA breach of fiduciary action resulted in the imposition of personal liability against a pension investment committee of a major plan sponsor for imprudently investing $211 million of plan assets without giving participants adequate information about risks involved with the investment.

What Can Be Done

What is surprising is that the current retirement plan crisis has occurred despite the government’s establishment of voluntary self-audit programs that enable employers to avoid stiff penalties imposed by the IRS and the DOL that could equal up to 20% of plan assets. Some employers have generally been reluctant to establish internal control procedures that identify and correct errors in operational compliance and have instead opted to play the “audit lottery” hoping that they won’t get caught by the IRS or the DOL. This reluctance by some employers to self-audit the operational compliance of their retirement plans should change with the enactment of the Sarbanes-Oxley Act (“SOX”), which for the first time ever imposes draconian sanctions and imprisonment of CEOs, CFOs, and other fiduciaries for failure to establish and monitor internal control procedures that would ascertain operational compliance. For example, a failure to comply with the new SOX ERISA White Collar Criminal Penalty requirements can result in a penalty of $100,000 per responsible individual and up to 10 years imprisonment.

The general consensus as to the “Best Practices” solution is an Independent Privileged Legal Review of compliance with SOX/IRS/DOL and ERISA requirements. The problem is that law firms in addition to reviewing compliance with such requirements do not have the ability to analyze the myriad of administration, accounting, actuarial and investment issues that impact the operation of retirement plans.

The answer to this dilemma is a unique patented process, The Fiduciary Audit® Protection Program, which has been embraced by major plan sponsors as the way to easily establish self audit internal control procedures that comply with IRS/DOL and SOX requirements. The Fiduciary Audit ® Protection Program, which is exclusively offered by Greenberg Traurig and its affiliate Fiduciary Audit Services, LLC, consists of a (1) Fiduciary Audit® Operational Review which assists employers in establishing and monitoring internal control procedures on retirement plan operations and (2) qualifies employers for coverage under the Fiduciary Audit ® Insurance Program, which indemnifies plan sponsor employers for any IRS, DOL, or SOX ERISA liability resulting from defects in the operation of retirement plans.

Frustrated by the inability to cost effectively establish self audit internal control procedures, the Fiduciary Audit ® Protection Program responds to employers who have heretofore been reluctant about exposing operational defects in their retirement plans which would otherwise require a submission to the IRS or the DOL. The Fiduciary Audit® Protection program gives employers the protection they want while they self audit. With the enactment of SOX, it is now a crime not to establish such self-auditing procedures. In addition, with the IRS and the DOL increasing their audit programs as a result of congressional pressure, it is paramount that employers establish self-audit programs that will mitigate the imposition of sanctions.

Fiduciary Audit® Protection Program

The Fiduciary Audit® Operational Review is different from Operational Compliance Reviews conducted by other law firms and accounting and consulting firms because it enables employers to:

  • Establish self-audit internal control procedures necessary to assure operational and plan document compliance and comply with the IRS Employee Plans Compliance Resolution System, ERISA Fiduciary and SOX Financial Reporting Requirements.
  • Qualify for relief from draconian monetary sanctions under the IRS Employee Plans Closing Agreement Penalty (“CAP”) Program.
  • Qualify for coverage under the Fiduciary Audit® Insurance Program (“FAIP”) which indemnifies Plan Sponsor employers and trustees for any IRS liability (IRS monetary sanctions and the cost of IRS-required corrections).
  • Qualify for lower costs to existing ERISA Fiduciary Liability Insurance policy and an endorsement providing protection against (i) SOX ERISA White Collar Criminal Penalty provisions, (ii) SOX Plan Blackout Penalty Provisions, and (iii) DOL civil penalty of 20% of applicable recovery amount for breach of fiduciary duty.
  • Obtain approval of correction methodology without submission to the IRS or DOL.
  • Avoid participant and governmental litigation and qualify for relief from ERISA liability under the DOL Voluntary Fiduciary Correction Program.
  • Avoid civil liability for corporate directors who fail to establish procedures for monitoring compliance where governmental agencies (IRS and DOL) have established self-audit compliance programs that encourage corporations to identify and correct employee benefit violations.
  • Qualifies the employer for coverage under the Fiduciary Audit® Insurance Protection Program covering any IRS liability (Audit CAP sanctions and the cost of IRS required corrections).
  • Lowers the cost of existing ERISA Fiduciary Liability Insurance policy and qualifies the employer for a policy endorsement providing protection against SOX and DOL liability.
  • Provides approval of correction methodology without submission to the IRS or DOL.
  • Includes a documentation of internal control procedures necessary to comply with SOX, IRS and DOL requirements.
  • Provides a comprehensive legal examination of service provider, vendor and investment product fees and expenses, which lowers plan costs and provides protection on governmental audits and litigation. It has resulted in savings of millions of dollars for plan sponsors and plan participants while affording protection from IRS and DOL/SEC Plan Expense Audit Initiatives and participant and governmental litigation.
  • Fiduciary Audit® Operational Review approved by IRS and DOL.
  • IRS and DOL have issued opinions approving payment of Fiduciary Audit® Insurance Program with plan assets.


© 2004 Greenberg Traurig

Additional Information:

For more information, please review our Executive Compensation & Employee Benefits Group description, or feel free to contact one of our attorneys.

This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.