Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
It’s that time of year where 401k plans need to be audited if they have more than 100 participants/employees. If you are such a company, you probably have someone in HR or Finance working with your plan’s recordkeeper or custodian to assist the auditor in performance of its duties. Maybe you even think that because your plan is audited that everything with the plan, including expenses, must be ok. After all, it’s being audited.
Well, you are probably incorrect. As a CPA, I wanted to write to clarify a few items around the annual Retirement Plan Audit as many people believe it does things it doesn’t do. This whole topic is top of mind at the moment because I am working with a prospect who has its plan audited. When we discussed the fees, the CFO actually referenced the audit indicating that the auditor documented $610 in fees for the plan. It was right there on the audit report. This is for a plan with over 130 employees. Sound too good to be true? It is.
Upon further digging, we found the advisor was being paid over $20,000. The recordkeeper, an insurance company, was receiving over $35,000, and yet the auditor signed off on the fees as being $610. How in the world can there be this much of a disconnect?
It’s important to understand what the audit is intended to do. According to the American Institute of Certified Public Accountants (“AICPA”) the purpose of the audit is to gain assurance that the financial statements as a whole are free from material misrepresentations. Moreover, in a Limited Scope Audit, which is almost all audits, the auditor does not audit certified investment information from an insurance company, bank, or trust company. It is in this area where the disconnect exists.
In my example above, the insurance company certified that only $610 were actual administrative expenses charged to the plan despite the fact that the plan had paid over $55,000 in additional fees! However, because the insurance company certified $610, the auditor put down $610 on the audit report and my CFO thought those were the expenses. Apparently, the auditor did not consider the extra $55,000 material to the financial statements and/or simply relied on the insurance company’s representation that $610 is all they needed to be concerned about.
Regardless of what the auditor was thinking, the above result is not good! $55,000 in fees IS MATERIAL. It may not be material to the financial statements themselves, but it is material to the employees in the plan who are saving for retirement. I’m not going to say if such a fee is prima facia excessive, that all depends upon what the employer is getting for those fees. What I am saying is that everyone should at least know what those fees are for so the right questions can be asked.
If you are an employer subject to a 401k plan audit, you may have a great auditor. However, a good auditor alone is not sufficient to provide assurance that your fees are reasonable and that you are getting appropriate services. For those answers, you need to speak with a retirement plan expert, like me.
Please give me a call. I would love to visit with you.
Pete Welsh a/k/a 401Guy
It’s mid-May, 2020, and every part of the country is in some stage of either planning to restart the economy or is doing so. It is certain to be a new world once everyone gets back on-line, and for some of you who will be either bringing back furloughed employees or rehiring, there are some things you should be considering with respect to your retirement plan.
With record unemployment numbers, it’s clear that many employers have downsized their companies either temporarily or permanently. In the “temporary” column are some employers who have laid off with an intent to rehire the same personnel as well as some employers who have terminated employees without the expectation of rehiring those specific employees when they start to come back on-line.
Once you start to bring back employees, you might have questions about when those employees should be permitted to contribute to their retirement plan. Moreover, what do you do with those employees who were maybe so new with your firm that they hadn’t yet qualified to participate in your plan. Where do they fall and when do we start the clock for them? Maybe they are eligible immediately upon returning to work? Maybe not? Who knows?
The good news is that there are rules to which we can turn for some of these answers. If you are rehiring employees who were already participating in your 401k program, they should be eligible to immediately begin deferring into your plan once you rehire them. A “separation from service” of only a couple of months is not great enough to qualify as a “break in service” which would require employees re-satisfy your plan’s eligibility requirements. They will also, most likely, not experience any gap for vesting purposes either.
Employees who had not yet met the eligibility requirement to participate in your plan should also pick up where they left off. For example, if you had an employee who was in the process of meeting the eligibility period, the time the employee was separated would count toward satisfying the waiting period. Sort of like they never left. Didn’t see that one, eh? Well, in truth it only works this way if your plan is on the "elapsed time" method versus "actual hours" method. Do you know which one your plan uses? Does your advisor? Some of these rules can be complicated.
If you are an employer who might not be rehiring a significant percentage of the laid off employees, you should also become familiar with “partial plan termination” rules. Generally, if 20% or more of your workforce is laid off, a partial plan termination will be deemed to have occurred with respect to those laid off/terminated employees and special vesting rules apply.
If you have questions about your plan’s operation and how to have a smooth restart once we get going again, please feel free to contact me at your convenience. These rules are not intuitive, and you want to get them right.
Pete Welsh a/k/a 401kGuy
There is much going on in the retirement plan community as we kick off 2020. New Legislation (the SECURE Act), new Regulation (the SEC’s Regulation Best Interest effective this summer), and all kinds of new research.
With respect to research, Russell Investments just published their newest study around anticipated changes that are likely to happen to your 401k plan in the next few years. The good news about most of the anticipated changes is that they will be “good.” “Good” being defined as a change that will better enable employees to prepare for a comfortable retirement. Everyone can get behind those kinds of changes.
One anticipated change that stuck out to me was their “prediction” that as a matter of best practice, employers will begin to conduct retirement readiness reports of their plans to better understand the “funded status” of their participants. The term “funded status” is generally used in defined benefit (“DB”) plans to indicate the extent to which the plan has the money to pay out benefits. This is another way of saying that in the future, employers will start to look at their employees’ savings and ask “are they on track.” I’m oversimplifying a bit, but not much.
The reason this stuck out to me is that I already do this with my clients. And have for quite a while. A prediction of something that is already occurring isn’t much of a prediction. However, as I thought about this, it occurred to me that maybe the majority of advisors do not assess retirement readiness, e.g. “funded status”, for their clients and that what Russell was saying is that “in the future” they might. Well, if this is what they are saying, then there is a problem.
If you are company that sponsors a 401k plan, I have to ask, does your advisor conduct periodic reviews of the plan’s retirement readiness? Are you aware on a quarterly basis how your plan is doing to prepare your employees for retirement? Does your advisor have a framework to assess these questions and provide you with objective reporting?
If the answer to the above is “no”, then I would respectfully suggest you have two options. The first option is to wait about 5 years as the authors of the research believe the probability to be 100% that such reporting will be in place by 2025. The second option would be to give me a call and we can start discussing how you can get this information today. After all, why would you want to wait 5 years when you can get a "future best practice” today?
Pete Welsh a/k/a 401kGuy