A U.S. Department of Labor (DOL) investigation of an employer-sponsored retirement plan may originate in a variety of ways.

It can be prompted by participant complaints, information obtained during an Internal Revenue Service (IRS) audit, information obtained from the plan’s service provider, data found in the plan’s annual Form 5500, or simply by a new initiative put forth by the federal agency. With so many avenues to an investigation, it is prudent for the plan sponsor to develop written procedures that are consistent with the plan terms, and to maintain organized records to document the plan administrator’s adherence with the procedures.

It’s not uncommon for the regulatory agencies that oversee retirement plans to disclose new initiatives aimed at ensuring that employees’ benefits are protected. So, for example, last year when the DOL disclosed that it would focus on pension plans’ procedures to locate and pay out benefits to terminated vested participants, employer plan sponsors paid attention, as the same obligation also applies to 401(k) plans.

This type of news can also serve as a reminder that all plan practices and procedures should be periodically reviewed to ensure that they are consistent with the terms of the plan, are being implemented as described in the procedures manual, and continue to comply with applicable law.

By adhering to a best practice of proactive and preventive retirement plan administration, plan sponsors will be better prepared for an agency or auditor review. This article looks at a few areas where a plan may be vulnerable, should the DOL come knocking.

Fiduciary Breaches

Years of work on a revamped DOL fiduciary rule have resulted in heightened attention being given to how plan expenses are being paid and whether the fees are appropriately being paid from the plan trust. The DOL has issued guidance designed to assist plan sponsors in determining whether and when plan expenses are actually a settlor expense, and will want to see evidence of a prudent review of any plan invoices.

This type of investigation may focus on possible conflicts of interest between the plan’s service providers and its designated investments, especially when the investments impose unreasonably high fees. Information likely will be requested that demonstrates the process through which service providers are chosen, how investments are selected, and the ways both are periodically monitored to ensure that the stated objectives are achieved.

In addition, with a rise in employee complaints, the inquiry instead could look to uncover whether any retaliatory acts have occurred toward the employee as a result of the complaint filed. Documents related to changes in an employee’s full- or part-time status, shift, or hours worked may be reviewed as part of such an investigation.

QDROs

The plan administrator is required to establish procedures for receiving, providing notice, reviewing, and implementing the award described in a qualified domestic relations order (QDRO). When a domestic relations order (DRO) is received by the plan administrator, a notice of receipt is to be sent to the participant, the alternate payee, and their respective counsel. During an investigation, the DOL may request to see the written procedures that outline the plan’s qualification process for DROs, responsible parties and related timelines, along with copies of the notification letters.

The plan sponsor should expect the DOL’s inquiry of this type to focus on whether the plan administrator’s practice is consistent with the written procedures. To the extent that the plan sponsor has contracted a service provider for QDRO services, it will be necessary to obtain sample forms and letters and transaction reports related to the QDRO process.

Another potential complaint filed with the DOL by alternate payees or their lawyers could be that the plan assets needed to satisfy the award described in the order have been withdrawn and are no longer available now that the order is determined to be qualified. During the qualification process, a hold should be placed on the participant’s account that would prohibit any distributions, and the amount of time the hold will remain should be communicated. The plan sponsor should be prepared to document that the plan’s procedures were correctly followed and that all interested parties received appropriate notice along the way.

Proceed with Caution

DOL investigations may occur at any time. So it makes sense—before the agency launches a review—to revisit the DOL’s published list of the following warning signs indicating participant deferrals may be at risk:

• 401(k) account statements that are consistently late or come at irregular intervals;
• Account balances that do not appear to be accurate;
• Failure to transmit contributions to the plan on a timely basis;
• A significant drop in a participant’s account balance that cannot be explained by normal market ups and downs;
• 401(k) or individual account statement that shows a participant’s contribution from his or her paycheck was not made; 
• Unauthorized investments listed on a participant’s statement;   
• Former employees having trouble getting their benefits paid on time or in the correct amounts;
• Unusual transactions, such as a loan to the employer, a corporate officer, or one of the plan trustees;
• Frequent and unexplained changes in investment managers or consultants; or 
• Recent severe financial difficulties experienced by the employer.

It’s also worth noting that some of the expected questions in the investigation may take a slightly different tack or require documents that might not have been requested previously for a 401(k) plan investigation.

Two common areas of inquiry are fees and timely contributions.

• Reasonable expenses. To comply with DOL regulations, a plan fiduciary must periodically engage in due diligence reviews to determine whether the fees and expenses paid are reasonable for services performed for the plan. While there are a variety of ways to go about benchmarking applicable fees, the DOL will look to see discussion in the plan’s retirement committee meeting minutes of administrative, investment, and related plan service fees.
  
  It’s also well-advised to keep the results of requests for information (RFI) and requests for proposals (RFP), materials describing investment changes that include lower cost alternatives for the plan’s investment lineup, and documented negotiations with plan service providers as evidence of the fiduciary’s efforts relative to plan fees.
• Timely contributions. The DOL will want to see records that confirm plan contributions are being made on the earliest possible date. In addition to meeting the first possible deposit date, the plan sponsor has to ensure that similar timing is occurring throughout the company, including any remote division that may rely on manual processes. Payroll and plan contribution records may be used to review the asset flow from the corporate account to the plan trust.

Finally, when any Employee Retirement Income Security Act (ERISA) fiduciary or plan administration issues are discovered, the DOL’s Voluntary Fiduciary Correction Program (VFCP) may be used to make necessary corrections. DOL’s Employee Benefits Security Administration (EBSA) intends to encourage employers and fiduciaries to comply with ERISA, and through this program, plan fiduciaries may self-identify and correct certain violations.