Dread is spreading among companies with pension...
Dread is spreading among companies with pension plans: Federal officials are finally beginning to enforce long-ignored retirement plan statutes and regulations. Companies that fail to comply face stiff Department of Labor and Internal Revenue Service fines and loss of their plans’ tax-exempt status. That has sent companies scrambling to pension consultants like Peter R. Stephan, president of Irvine-based The Pension Group Inc., for advice on how to ensure compliance. Stephan recently talked to Times correspondent David Tobenkin.
What is the biggest compliance problem facing companies with pension plans?
Non-compliance with regulations requiring filing of complete and timely annual reports, which are called Form 5500. In the past, penalties were imposed on plan administrators primarily for filing annual reports that were seriously deficient in material information. Now merely missing the deadline could subject the employer to the penalties.
What are the penalties for filing Form 5500 late or improperly?
If you are basically late or delinquent, the IRS can assess a penalty of $25 per day per plan up to a maximum of $15,000 per year. The Department of Labor can additionally assess a penalty of $300 per day per plan to a maximum of $30,000 per year per plan. It’s both, not one or the other.
These statutes have been on the books for many years. What signs are there that the government is really beginning to enforce these laws?
A lot of federal agencies are cutting back on staff, but the Department of Labor is in the process of doubling its enforcement division to 500 full-time staffers and its litigation staff to 75. The Department of Labor also installed a $40-million computerized database into which it has begun feeding information from Series 5500 filings. The system can also monitor asset diversification and allows the Department of Labor to target plans with high concentrations in any one investment category. It’s clear that the government is beginning to look to ERISA (Employee Retirement Income Security Act of 1974) violations as a potential source of revenue. It’s taken the department a while to gear up, so you will probably see actual enforcement begin in 1994 or 1995.
What should a company do if it is still not in compliance?
If you are delinquent and late, I would say go ahead and file. They obviously want to increase revenue but they also look at facts and circumstances. I would say that I’ve missed the filing but nobody was harmed in the plan and perhaps work with an attorney or plan consultant to get the penalty abated or reduced. Certainly you should bring it up first before the IRS or the Department of Labor brings it to you.
What other areas of compliance are new or being targeted with more vigor by the Department of Labor?
The IRS and the Department of Labor are targeting those areas where required filings, such as 1099-R information on distribution in a plan, are not made timely or not made at all. In addition, other targeted areas are improper valuations of plan assets and participant loans. For example, certain real estate limited partnerships have been carried on an at-cost basis since their purchase, which contradicts the requirement for an annual market valuation or appraisal. Also, the Department of Labor will be focusing on participant-directed account plans, such as 401(k) plans, next year. They will be looking for employers who do not provide adequate disclosure of investment guidelines and risk at least quarterly to participants.
Is there a danger to employees’ benefits if a company is not in compliance?
Generally not. Any type of penalty assessment that is made for non-compliance will go against the employer and the plan trustees--not the employees.
What services do companies like yours provide?
We assist the employer in designing the plan to meet the company’s objectives. Then we communicate the plan to employees, giving them summaries of benefits and explaining how the plan operates. And we administer the plan as best possible to meet the disclosure requirements.
How much do third-party administrators charge?
Third-party administrators typically charge $1,000 per year for a small company profit-sharing plan to $5,000 per year for a 401(k) serving 60 participants. We charge a flat annual fee plus an hourly charge for optional services like extra consulting, preparation of financial statements and annual reports.
Many pension investment advisers offer similar services for free in so-called bundled plans, which they are able to do because they make their profit from the investment income the portfolio generates. Why shouldn’t an employer just use them?
I would say bundled plans have their place, typically as a good starter plan. Once the plan enters the second year, though, operational issues and questions become more frequent and exceed the capability of a bundled-service provider. Generally, bundled-service providers are order takers and are not trained in a plan. Unbundled-service providers can provide the necessary consulting and direction when and if a company encounters problems with its plan.
An upcoming regulation would let companies escape liability for poor investments when employees make their own investment decisions. Which companies would qualify?
Key factors in qualifying include offering three investment options in a plan, allowing employees to transfer between options at least quarterly and adequate disclosure to participants. . . . Employers who don’t comply will bear increased risk of Department of Labor action if an employee loses money and complains to the department.
On pension law regulators . . .
“The Clinton Administration as well as the Department of Labor and the IRS are taking a very close look at regulatory compliance in order to generate revenues by penalty assessments.”
On increased disclosure requirements for plans with investment options . . .
“With more employees being given choices in investment options, the company . . . is under scrutiny to make sure it has properly disclosed all the facts.”
On how to lower pension administration costs . . .
“Too many frills cost money. Go back to basics and build a long-term focus.”
On choosing third-party pension plan administrator . . .
“Ask what they specialize in: small plans or large plans? Is their staff current with the latest regulation changes?”
