DOL Shifts Efforts on Its Approach to Investigations ofPlan Sponsors
The Department of Labor (DOL) has announced a shift in its enforcement resources from fiduciary providers (investment advisors, investment managers, trustees, etc.) to the financial institutions that provide services to ERISA plans (record keepers). With this change, the DOL will now be able to potentially investigate thousands o fplans as opposed to its current method, which addresses plans on a singular basis. In addition, the department has recently made a few critical changes regarding its investigation processes.
· The DOL is enlisting teams for investigations allowing for a higher detail review. These teams may include investigators, forensic accountants, and financial analysts.
· Investigators are requesting a more significant amount of information from the service providers or the plan sponsor of the plan being reviewed.
· The DOL investigation team may stay on-site or engage in discussions with service providers for a longer time than a standard audit.
· Small violations could generate investigation into multiple plans that the service provider oversees, risking penalties to either the service provider or the plan.
Overall, plan sponsors must be aware that with these new practices implemented by the DOL, there is a higher chance of an audit. It is critical that plan sponsors review and hold their service providers accountable to meeting their required responsibilities. Only with this oversight, can plan sponsors reduce the risk of audit and unexpected costs.
This new shift in attention is expected to increase the number of plans that the DOL reviews each year.
You may ask, “What prompts the DOL to investigate a plan?” There’s no way to know for sure, and the DOL is not required to disclose their reason. However, the United States GovernmentAccountability Office report, issued in May2021, offers some insight on red flags that could prompt an audit.
Here are some of the more common items that prompt an audit:
· The DOL discovers a concern that relates to a service provider during the course of an unrelated plan-level investigation, prompting the department to review many other plans for the same deficiency.For example, a systemic issue such as improper or lack of procedures for managing uncashed checks or inadequate fee disclosure practices.
· A complaint from plan participants or plan sponsors is reported to the DOL. The DOL may investigate this same complaint with other plans that the service provider oversees.
· The DOL receives a recommendation to review a plan, or a service provider reported by a federal or state agency, such as theSEC.
· The annual IRS Form 5500 filing has concerning in formation that requires an audit to gain clarification.
· A red flag, such as a bankruptcy filing, is detected when reviewing litigation findings.
· Reports in the media isolating a plan or a service provider for potential risks to its participants.
· Changing national enforcement priorities can also trigger investigations of plan service providers such as the DOL’s PlanInvestment Conflicts initiative. For example, in 2020 the DOL investigated investment managers and plan consultants who incorporated environmental, social, and governance (ESG) factors into their investment decisions without proper education and notice to their participants.
There are many reasons that the plan service providers could be audited, generating a closer look at the plans they supervise. Therefore, asa plan sponsor, it is important that you oversee all of your compliance requirements in the event that your plan becomes part of a larger audit.
Due to the higher possibility of investigation, it is important for you to be aware of the basic steps involved in the process.
1. Notice: The DOL will contact the plan sponsor with a notice that the plan has been chosen for review. This notice will include a request for documents and data. Additionally, the DOL may reach out verbally to engage in some back-and-forth dialogue to streamline the area/s of review. As a plan sponsor, it is important to be aware that some information requested may contain sensitive plan and participant data. Depending on the information requested, the plan sponsor may need to provide notice to plan participants before responding to the DOL. It is always advised to have an attorney review all requests from the DOL to make sure the requested information is relevant and that the plan sponsor provides the proper notifications to any affected party.
2. Key Employee Interviews: These in-person interviews are not formal depositions; however, a plan sponsor should be aware that information the DOL obtains during interviews could be used as evidence in a legal case. It is important to select the proper employees for these interviews. The interviewees should be prepared in advance of their conversations with the DOL. Preparation can help to ensure that the interviewees keep their answers short and relevant to the questions asked by the DOL.
3. Evaluation: In this phase, there may be requests for additional documents and interviews. Investigators have been known to review data multiple times. Additionally, investigations are typically conducted over multiple years, often resulting in a change of the primary investigator(s). In the case of a long investigation, the DOL may request for both parties to agree to suspend the statute of limitations.
As you can see, the audit process can create a large distraction for the company under review. The more prepared a plan is prior to an audit, the easier it will be to prove to the DOL that the plan meets its operational and fiduciary responsibilities. Like many things in life, a little work every day, month, and year, can save significant time and stress in the long run.
If an investigation appears imminent, plan sponsors should consider who they would ask to represent the company if chosen. The best representative should be someone who is able to protect the company both legally and reputationally.
At times, the DOL may recommend that the business make significant changes to its business practices. Some investigators have been known to be fairly aggressive with these requirements. Therefore, the employee or team advocating for the business must understand the current practices, how they are executed and monitored, and should be able to defend these procedures as being reasonable efforts in addressing the areas of concern that the DOL agent is considering.
Over the last 10 years, the Department of Labor (DOL) has typically focused on 7 major areas in their investigations. While an audit may focus on the initial complaint or potential common mistake that generated the investigation, once the DOL is requesting information, they could look at one or all of the following items:
1. Abandoned retirement plans – plans that are not being managed or overseen.
2. Fee disclosures – improper distribution of participant disclosures.
3. Trading error corrections – trading the incorrect funds or not trading funds in a timely manner.
4. Uncashed checks – distribution checks top articipants that do not clear.
5. Missing participants – accounts where participants are unable to be contacted due to a change in address or phone number.
6. Cross-trading – when a plan allows an investment advisor makes unneeded trades generating higher costs.
7. Retention and disclosure of “float income” – not reporting income made while the funds are moving from one investment to another.
As times change, other areas of focus may join the list. For example, cybersecurity is currently a “hot topic” and more DOL investigations are reviewing cyber controls as part of an audit.
Plan sponsors and plan committees should recognize these key areas of investigation. In each area above there should be documented processes and systems to monitor compliance with these processes. The more proof you can provide to a DOL agent that you are compliant in these key areas, the faster an audit gets completed and the less distraction it will cause to your business.
Company reputation is another area that has to be protected during a review. DOL agents may request to contact clients, vendors, or business partners directly to request additional information or confirm facts.In most cases, these requests are not necessary. Company representatives who are able to offer alternative solutions to provide the agent with their requested information and/or negotiate with the agent will prevent the audit from spreading outside of the company and limit any reputational risk.
Overall, it is best to take a strategic approach when working with investigators. Be cordial and professional throughout the process, even if things become adversarial. Do not be afraid to defend your business practices or to require the investigator to explain why they are requesting certain information. Finally, wait until the final report is completed before you make any unwanted changes. The final report allows you an opportunity to question, understand, and even appeal any required adjustments to your plan or processes.
