Today’s Retirement Plan Environment Leaves Much for Concern
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.
|"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
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
- 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
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& Employee Benefits Group description, or feel free to contact one of our
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.