Three cases of enforcement action highlighting the DOL’s commitment to ‘a rigorous enforcement of the law’, underscore the need for competent guidance on ERISA compliance and the need for advisors to adapt to compete and comply!
The cases summarized below highlight the DOL’s commitment to ‘a rigorous enforcement of the law’ and underscore the need for competent guidance on ERISA compliance. While proactive retirement plan advisors are leveraging new challenges to create opportunities (e.g., educating plan sponsors on requirements, assisting with the implementation and maintenance of policies and procedures, supporting document retention and compliance reporting, etc.), many financial professionals lack the experience or commitment to assist in this regard. Because most plan sponsors rely upon their financial advisor for guidance, he/she may be interviewed as part of the DOL’s investigation.
Indeed, the DOL’s Consultant Advisor Project, which it operates in connection with an information-sharing arrangement with the SEC, specifically targets the services and compensation of retirement plan advisors. If the DOL uncovers any irregularities during a routine or for cause plan investigation, it may seek to ascertain whether a violation is systemic with respect to the financial services provider or its affiliates. Given that most broker-dealers and investment advisers do not employ in-house ERISA expertise, it is recommended that they look to outside support for education and develop specific protocols for ERISA compliance.”
Excessive Fiduciary Compensation
On July 5, 2012 the Department of Labor announced that the National Rural Electric Cooperative Association (NRECA) has agreed to a $2.7 administrative fine and to restore $27.3 million to three association sponsored retirement plans. During this investigation the DOL found that NREC selected itself as a service provider to the plans, determined its own compensation and made payments to itself that exceeded NRECA’s direct expenses in providing services to the plans, in violation of ERISA. “This settlement sends a clear message to plan fiduciaries that they cannot profit from selecting themselves to provide services to plans,” said Phyllis Borzi, assistant secretary of labor for employee benefits security.
Additionally, as part of the agreement with the DOL, NRECA has agreed to not provide administrative services to the association sponsored retirement plans without entering into a written contract or agreement with the plans that has been approved by an independent fiduciary. As part of its review of the written contracts, the independent fiduciary must determine:
- whether the use of NRECA to provide administrative services to the plans is prudent and reasonable;
- the categories of direct expenses that NRECA may charge to the plans; and,
- the methods of calculating those expenses.
Improper Participant Loans
On July 12, 2012 the a federal judge in Chicago, IL signed a Consent Agreement between the Department of Labor and David Fensler, Anthony Monaco and the United Employee Benefit Fund. The Consent Agreement requires the defendants to amend retirement plan documents so that they comply with the requirements of ERISA. According to the DOL’s press release, David Fensler, Anthon Monaco and fund trustees allegedly approved at least $1.7 million in improper loans to 194 to individual participants in the United Employee Benefit Fund and made no effort to collect the loans. As of December 31, 2009 none of the loans had been paid in full and only six participants had ever made any loan payments on loans issued to them. Among other provisions, the terms of the consent order also require the plan to amend improper loan documentation, collect repayments from plan participants or issue 1099 to treat the loans as taxable distributions.
“Plan fiduciaries have a special obligation to maintain the integrity of the plan for the purpose of ensuring future retirement income. Allowing participants to withdraw plan assets without regard to ERISA’s safeguards violates that basic principle,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Our legal action underscores the Labor Department’s commitment to hold accountable those who are entrusted with the assets of employee benefit plans.”
Improper Oversight of Plan Administrator by Plan Sponsor
On July 18, 2012, a federal judge has ordered the owners of Columbus, OH based, Clark Graphics to restore $500,000 to the defined benefit and profit sharing plans offered to its employees. Additionally, the judge has ordered the owner of the former plan administrator, Pension Retirement Planning, to restore $560,000 to these same plans, less any payments made by other defendants. According to the DOL’s press release, the owners of Clark Graphics failed to monitor the actions of the plan administrator; failed to review and reconcile plan account statements; review participant distribution calculations and require the administrator to issue participant statements. The plan’s administrator also failed to maintain accurate records for participants in both plans.
“Employers that sponsor retirement plans have a fiduciary duty to monitor plan assets and ensure they are handled appropriately and protected,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Contracting with an outside firm to manage those assets does not absolve them of their legal responsibilities. Congress made it clear long ago that money set aside for retirement is much too important to mishandle, abuse or neglect, and enacted strict protections with respect to workers’ hard-earned savings.”
The order also permanently enjoins the owners of Clark Graphics and the former owner of Pension Retirement Planning from serving as fiduciaries to any employee benefit plan subject to ERISA. Pension Retirement Planning, provided third-party record-keeping services to as many as 51 ERISA-covered pension plans during the decade leading up to 2010, when it ceased operations.
According to a recent study by Alliance Bernstein, only 63% of all plan sponsors consider themselves to be plan fiduciaries.