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
Northrup Grumman recently settled a lawsuit (while denying all liability for the claims and maintaining they were without fault, of course) for a little over $12mm. This case is not unlike many suits brought against large retirement plans in recent years. The arguments of “unreasonable fees” and “fund mismanagement” are well trodden paths in 2020, and these were the allegations against Northrup Grumman.
What is interesting, however, is that Northrup Grumman was not a fiduciary with respect to its retirement plan. In fact, almost 2 years ago the court actually dismissed most all the claims against the company itself. Northrup Grumman was very clever in its establishment of its retirement plan and specifically designated 2 committees – an Administrative Committee and an Investment Committee – to serve as the plan’s administrator and named planned fiduciaries. They outsourced fiduciary responsibilities to two committees! Clever!
So, if Northrup Grumman was not a fiduciary to its own retirement plan and therefore can’t actually be found guilty for any violation of a breach of fiduciary responsibility, why then did it recently settle for $12mm???
The answer to this question lies in ERISA Section 1002(21)(A) which says that the ability to appoint, retain, and remove plan fiduciaries is itself a fiduciary responsibility and there is an ongoing duty to monitor those who you appoint. I recognize this is a fine point, but very important.
In 2018 when the court dismissed most all the counts against Northrup Grumman, one they did not dismiss was the duty to monitor other fiduciaries they appointed, i.e. those 2 Committees! It’s another way of the court saying, “Ok, Northrup, we’ll let you out of all those direct charges against you, but if those two committees acted improperly, guess what, you’re still liable!”
Today it is very common for plan sponsors to appoint investment advisors, investment managers, and even Plan Administrators who make the pitch that by appointing them the employer is relieved of fiduciary responsibility. If you are such a company, how well do you know your advisor? How well is he or she performing those duties for which you are no longer responsible? Everything good??? You sure??
If you have any concerns about the duties for which you might still be held responsible, give me a call as I would love to visit with you about how to establish a proper fiduciary governance program to help ensure you are never left holding the fiduciary bag at claim time.
Pete Welsh a/k/a 401kGuy