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Investigations of financial institutions.

737. Does the DOL investigate financial institutions that serve employee benefit plans?

Yes. Financial institutions provide services to employee benefit plans in many different capacities. Typically, they provide checking and savings accounts for plans, contribution collection services, and custodial services. With respect to the direct investment of plan assets, financial institutions serve as investment managers and advisors, directed trustees, and co-trustees to plans. In addition, they provide plans with investment vehicles, such as participation loans, pooled or collective investment funds, and deposit administration contracts. Some financial institutions are involved in broker-dealer activities, particularly with discount broker operations.

In accordance with the ERISA Enforcement Strategy Implementation Plan of 1990, the Employee Benefits Security Administration (EBSA) has previously selected abusive practices by financial institutions for investigation for a variety of reasons. First, ERISA is a very complex law and other regulatory agencies cannot be expected to fully understand the interrelationships among applicable law, ERISA, and the numerous ERISA exemptions and regulations. The absence of any federal regulations in the insurance industry and the unevenness of state regulation provide an additional reason for EBSA to protect the interests of employee benefit plans from abusive practices committed by a relatively small number of insurance companies. Finally, and presumably because of resource limitations, federal and state bank regulators have emphasized the commercial operations of banks in their examination activities, as opposed to bank trust department operations where most employee benefit plan assets are held and where most abusive practices relating to employee benefit plans occur. (2)

738. What are the types of issues involving violations of ERISA and financial institutions?

According to the DOL, generally, substantive issues involving violations of ERISA committed by financial institutions acting as fiduciaries to employee benefit plans fall into two categories. The first category involves the financial institution's management of plan assets. Despite the professionalism of many institutions, there exists the possibility of improper and imprudent management and investment of plan assets. The second, and more serious, category of violations concerns conflict of interest and self-dealing situations. Examples of these violations include: (1) transfers of bad loans from a bank's commercial department to its trust department; (2) the charging of excessive fees (either directly or through a related entity, such as a stock broker); and (3) the use of plan assets for permanent financing of risky construction projects for which the financial institution has provided interim financing. Also, financial institutions may extend certain "favors" to employee benefit plan fiduciaries in order to retain plan or plan sponsor business. Examples of these "favors" include the making of low interest or unsecured loans to plan fiduciaries, agreement to plan sponsors' directions of imprudent investments, and the promise of gifts or other gratuities to plan fiduciaries. (1)

739. What types of financial institutions are investigated by the Employee Benefits Security Administration?

The Employee Benefits Security Administration has investigated the following financial institutions:

1. Banks. Many employee benefit plans receive services from state or nationally chartered banks. These services range from a bank providing a simple checking account to a bank serving as a plan's sole discretionary trustee. Banks are involved in both the short-term and long-term investment of plan assets. Banks provide pooled investments and other collective trusts for plans.

2. Savings and Loan Associations. Similar to banks, savings and loan associations provide a variety of services to employee benefit plans. They manage plan cash in the shortterm and provide certificates of deposit for long-term investing. In addition, savings and loan associations provide many investment vehicles for plans such as participation loan packages.

3. Trust Companies. Trust companies are primarily involved in managing trust assets and sometimes act as a conduit for plans investing in real estate, mortgages, and other types of investments. Trust companies frequently serve as fiduciaries to employee benefit plans.

4. Investment Management Companies. These entities, although not banks, savings and loan associations or trust companies, receive large sums of money from employee benefit plans and are responsible for the investment of that money. Often these companies also have money from non-ERISA accounts that they are also responsible for investing. Mutual funds and other investment vehicles are expressly excluded from this category as they do not involve the investment of plan assets.

5. Insurance Companies. In addition to the provision of insurance, insurance companies provide a large variety of services and investments to plans, sometimes in a fiduciary capacity, such as deposit administration contracts, annuities, and collective or pooled investment arrangements. (2)

740. What are the goals and objectives of the Employee Benefits Security Administration in investigating financial institutions?

By investigating abuses committed by financial institutions, the Employee Benefits Security Administration (EBSA) attempts to protect participants and beneficiaries of employee benefit plans by ensuring that these institutions are holding, managing, and investing plan assets in accordance with ERISA. The objectives of EBSA in such investigations are as follows:

* Targeting enforcement efforts on plan assets held by at least two financial institutions located in each state;

* Concentrating EBSA investigative resources on individuals and entities believed to be involved in the most egregious conflicts of interest and self-dealing violations;

* Where violations of ERISA are uncovered, seeking to promptly protect and preserve plan assets, recover plan losses and, if appropriate, remove violators from activities associated with employee benefit plans; and

* Seeking the assistance and cooperation of federal agencies that regulate financial institutions. (1)

741. What is the focus of DOL financial institution audits?

The Enforcement Strategy Implementation Plan of 1990 (ESIP) required the DOL to allocate 50% of its investigative resources to investigations of significant issues. Consequently, in the years following the issuance of the ESIP, the DOL has focused a tremendous amount of time and resources on conducting investigations of financial institutions. Since the Strategic Enforcement Plan (StEP) does not mandate that any specific percentage of fiduciary investigative time be devoted to the targeting and investigation of these issues or entities, it is presumably at the discretion of the Regional Office of the Employee Benefits Security Administration to determine the amount and percentage of its investigative resources that will be allocated to investigations of financial institutions.

Financial institutions that are subject to the DOL's service provider investigations include banks, savings and loans, trust companies, investment management companies, and insurance companies.

The issues and documents reviewed in a financial institution audit by the DOL include the following:

1. The relationship between the commercial department and the trust department .This issue involves the review of potentially improper arrangements or relationships between commercial and trust departments of banks or similar departments of other financial institutions.

2. Prudence and exclusive purpose of the bank as trustee. This issue involves the failure of financial institutions to act independently or in the sole interest of plans when acting in the capacity of a co-trustee, directed trustee, or fiduciary.

3. Investment vehicles. This issue involves the investment of client plan assets in collective investment funds with low earnings and a high concentration of plan asset investments in real estate or other similar investments in a specific geographic or economic area.

4. Plan equity portfolio management and proxy voting. This issue involves the failure of financial institutions to manage plan equity portfolios or to vote plan stock in the sole interest of participants and beneficiaries.

5. Fees charged by the bank. This issue deals with the appropriateness and reasonableness of fees and other charges of financial institutions to employee benefit plans.

6. "Soft dollar" arrangements. This issue involves the propriety of "soft dollar" arrangements involving financial institutions that manage and invest plan assets.

In the conduct of a financial institution audit, the investigation will review a sample of the institution's ERISA plan client files. A rule of thumb for determining how many client files to review is the "25 plus 10" rule. The "25 plus 10" rule requires the investigator to randomly select, from the ERISA plan client list provided by the financial institution, 25 client plans plus 10% of the overall number of ERISA client plans serviced by the financial institution. For example, if a financial institution services 200 ERISA covered plans, the "25 plus 10" rule will result in the review of 45 ERISA plan client files. In the review of these files, the investigator will review: (1) the trust agreement and amendments; (2) the plan document and amendments; (3) the plan adoption agreement and amendments; (4) the applicable agency agreements; (5) the IRS determination letter; (6) the correspondence file; (7) the trust annual reports (for a minimum of three years); and (8) the Annual Report Forms 5500 (for a minimum of three years).

For a review of specific questions asked by the investigator in reviewing individual ERISA plan client files, see Q 744.

742. How does the Employee Benefits Security Administration select financial institutions as targets of investigation?

The Employee Benefits Security Administration (EBSA) has viewed the selection of financial institutions to be investigated for potential abuse as crucial to the protection of employee benefit plan assets, the efficient use of investigative resources, and the detection of ERISA violations. EBSA selects investigative targets through a detailed review of intelligence data available from a wide variety of sources. These sources include, but are not limited to, the following:

* EBSA case files, and other intelligence files that identify financial institutions providing services to employee benefit plans;

* Data contained in Master Trust and Common Trust Annual Report filings;

* Information contained in Form 5500 Annual Report filings;

* Applications and comments submitted by financial institutions and other interested parties in connection with individual or class exemptions proposed or granted;

* Information on problem institutions obtained from federal and state regulatory agencies, such as state insurance commissioners; and

* Information identified in public sources, such as legislative committee hearings and trade publications. (1)

743. What factors are considered by the Employee Benefits Security Administration in selecting financial institutions for investigation?

The selection of financial institutions for investigation by the Employee Benefits Security Administration (EBSA) takes into consideration the following: (1) the size of the financial institution in terms of plan assets held, managed, or invested; (2) the number and size of employee benefit plan clients; (3) the geographic location of the financial institution; (4) the type and variety of financial services offered to plans; (5) the reputation and standing of the financial institution in the community, as determined by industry professionals and government regulators; and (6) the likelihood of finding ERISA violations involving selected areas of significant concern to EBSA. (2)

744. What are the issues covered in a review of individual ERISA plan client files in a financial institution investigation?

Financial institution investigations by the DOL require the investigator to carefully review a specific number of ERISA plan client files. In the review of those files, the investigator is guided by an account examination sheet that details the issues to be examined. The following is a review of the questions detailed in the financial institution account examination checklist:

1. Is the financial institution named as trustee?

2. Does the financial institution have investment responsibility? According to which trust agency/agreement section?

3. Does the plan sponsor direct the financial institution on investment of assets?

* According to which trust agency/agreement section?

* Are written investment instructions contained in the file?

4. Does the client plan have an outside investment manager? On all or a part of the assets?

5. What percentage of plan assets are invested in CTFs and/or government securities?

6. Is the trustee/custodian/agency fee paid by the plan?

* Which section of the trust/agency agreement permits the plan to pay this fee?

* Does the fee appear to be reasonable for the services rendered?

7. Is the plan charged sweep fees?

* What was the time period for which the fees were incurred?

* What were the total sweep fees for the last three years?

8. Does the plan hold investments in Bank CTFs? Which trust agreement section permits this?

9. Does the plan hold participant loans?

* Which section of the plan document permits this?

* Are all payments current?

* Are the loans adequately secured?

* Is the rate of interest reasonable?

* Is the loan within statutorily defined limits?

10. Does the plan hold employer securities?

* Which section of the trust agreement permits this?

* Are the securities qualifying?

* Are the holdings within the ERISA Section 407 limits?

11. Does the plan hold employer real property?

* Which section of the trust agreement permits this?

* Is the property geographically dispersed?

* Is the rent charged adequate and current?

* What are the dates of the latest appraisals?

* What are the terms of the leases?

* Are the lease(s) apparently from an arm's-length transaction?

12. Does the plan own any interests in limited partnerships?

* Which section of the trust agreement permits this?

* Is the prospectus in the file?

13. Does the plan own real estate?

* Which section of the trust agreement permits this?

* Is it carried on the books at market value?

* What was the date of latest appraisal?

* Was it appraised free of encumbrance?

* Is the real property leased or occupied by a party in interest?

* Does the lease appear to be at an arm's-length?

* Is the rent adequate and current?

* What are the terms of the lease?

14. Does the plan own mortgages?

* Which section of the trust agreement permits this?

* Is the mortgage adequately secured?

* Is the property adequately insured?

* Are mortgage payments current?

* Are the interest rate and terms of the mortgage reasonable?

* How was the mortgage obtained?

15. Does the plan hold promissory notes other than on participant loans?

* Which section of the trust agreement permits this?

* Does the note represent a loan to a party in interest?

* Is the loan adequately secured?

* Are payments on the note current?

* Are the terms and interest rate on the note reasonable?

16. Does the plan hold precious metals, art, or collectibles?

* Which section of the trust agreement permits this?

* What percentage of plan assets were represented by the purchase when made?

* What percentage of plan assets are currently represented by these holdings?

* Are current appraisals of these holdings in the plan file?

* What is the appraised value of these holdings?

* Where and when were these holdings obtained by the plan?

17. Does the plan invest in commercial paper?

* Is the commercial paper issued by a party in interest?

* If so, does it satisfy the requirements of PTE 81-8?

18. Does the plan invest in repurchase agreements?

* Are the repurchase agreements with a party in interest?

* If so, do they satisfy the requirements of PTE 81-8?

19. Does the plan invest in certificates of deposit?

* Are they with a party in interest?

* If so, do they satisfy the requirements of PTE 81-8?

This checklist and the general financial institution investigative guidelines are designed to identify improper or imprudent instances of plan asset management, as well as violations involving conflicts of interest and self-dealing between the plan and the financial institution service provider. Such violations include:

1. Transfers of bad loans from the financial institution's commercial loan department to the trust department;

2. The charging of excessive fees; and

3. The use of plan assets for the permanent financing of risky construction projects for which the financial institution has provided interim financing.

The Enforcement Strategy Implementation Plan (ESIP) also cautions that financial institution investigations have discovered situations where the financial institution has extended favors to clients who are ERISA plan fiduciaries in order to retain the plan or the plan sponsor as a client. Such "sweetheart deals" include gifts, gratuities, and unsecured or low interest loans. (1)

745. What are the issues covered under the DOL's HIPAA service provider enforcement/ compliance review?

In mid-1999, the use of HIPAA enforcement/compliance questionnaires originated in one of the DOL's Regional Offices as an added aspect of their service provider investigations. On June 11, 1999, at the IRS Midwest Benefits Conference in Cincinnati, Ohio, the DOL announced that they would be launching a National Office directed HIPAA Compliance/Enforcement project in October, 1999. The DOL National Office Project is based upon the regional office efforts identified above, and the enforcement checklist will either be, or closely resemble, the checklist detailed below.

The questionnaire has been designed for use in a "desk audit" situation. That is, the target of the inquiry will receive the checklist in the mail or via facsimile, along with a request that a written response and supporting documentation be forwarded to the issuing office within 10 business days. The cover letter also advises that "submission of relevant documents to our office prior to the inception of on-site field investigation can lessen the time subsequently spent with, and the administrative burden placed upon (service provider target) personnel."

Compliance with the HIPAA Provisions in Part 7 of Subtitle B of Title I of ERISA

(Specific Lines of Inquiry Presented by DOL Field Offices in Conducting Investigations)

If any of the below requested items are voluminous in nature, the DOL advises that the recipient may submit the relevant parts of the requested items that relate to the specific question or following questions.

1. Provide a copy of the Plan's (a) Summary Plan Description, (b) Plan Document, and (c) Plan Group Policy.

2. Does the group health plan automatically issue complete certificates of creditable coverage free of charge to individuals who lose coverage under the plan, and to individuals upon request? (1)

3. Does the group health plan have a written procedure for individuals to request and receive certificates?2

4. If the group health plan imposes a preexisting condition exclusion period, does the plan or issuer issue a notice informing individuals of such exclusion period, the terms of such exclusion period, and the right of individuals to demonstrate creditable coverage (and any applicable waiting or affiliation periods) to reduce the preexisting condition exclusion period? (3) [The plan sponsor may be asked to provide copies of the General Notice of Preexisting Condition Exclusions sent to two different plan participants.]

5. If the group health plan imposes a preexisting condition exclusion period, does it issue letters of determination and notification of creditable coverage within a reasonable time after the receipt of individuals' creditable coverage information? (1) [The plan sponsor may be asked to provide a list or log of Individualized Determination of Preexisting Condition Exclusion letters sent out in the last 12 months.]

6. Were any of the above individuals not provided a certificate of creditable coverage from their prior plan? [If so, the plan sponsor must identify them and explain and provide supporting documentation as to how the matter was resolved. If there have been more than three individuals, the issuing DOL Investigator will select the individuals for which supporting documentation must be applied.]

7. If the group health plan imposes a preexisting condition exclusion period, does it comport with HIPAA's limitations on preexisting condition exclusion periods? (2) [The plan sponsor may be asked to provide a list of all claims that were denied in the last 12 months due to the imposition of a preexisting condition exclusion period, as well as records showing the enrollment dates of the individuals involved.]

8. Does the group health plan have written provisions notifying individuals who are ineligible to enroll in the plan of coverage of special enrollment rights, and issue notices of special enrollment rights? (3)

9. Does the group health plan have written procedures that provide special enrollment rights to individuals who lose other coverage and to individuals who acquire a new dependent, if they request enrollment within 30 days of the loss of coverage, marriage, birth, adoption, or placement for adoption? (4)

10. Do the group health plan's rules for eligibility to enroll under the terms of the plan or coverage (including continued eligibility) comply with the nondiscrimination requirements that prohibit discrimination against any individual or a dependent of an individual based on any health status-related factor? (5) [The plan sponsor may be asked to provide a list of any applicants or participants denied eligibility to enroll during the last 12 months.]

11. Does the group health plan comply with the nondiscrimination requirements that prohibit requiring any individual (as a condition of enrollment or continued enrollment) to pay a premium or contribution that is greater than the premium or contribution for a similarly situated individual enrolled in the plan on the basis of any health status-related factor? (6)

12. If the group health plan is a multiemployer plan or a multiple employer welfare arrangement (MEWA), does it comply with Part 7 (guaranteed renewability requirements), which generally prohibit it from denying an employer whose employees are covered under a group health plan continued access to the same or different coverage under the terms of the plan? (1) [The plan sponsor may be asked to provide a list of any employers who have not renewed coverage during the last 12 months.]

(2.) ERISA Enforcement Strategy Implementation Plan, Sept. 1990, pp. 12-13.

(1.) ERISA Enforcement Strategy Implementation Plan, Sept. 1990, p. 13.

(2.) ERISA Enforcement Strategy Implementation Plan, Sept. 1990, p. 14.

(1.) ERISA Enforcement Strategy Implementation Plan, Sept. 1990, p. 15.

(2.) ERISA Enforcement Strategy Implementation Plan, Sept. 1990, pp. 15-16.

(1.) ERISA Enforcement Strategy Implementation Plan, Sept. 1990.

(1.) Labor Regs. [subsection] 2590.701-5(a)(2)(ii), 2590.701-5(a)(2)(iii).

(2.) Labor Reg. [section] 2590.701-5(a)(4)(ii).

(3.) Labor Reg. [section] 2590.701-3(c).

(1.) Labor Regs. [subsection] 2590.701-5(d)(1), 2590.701-5(d)(2).

(2.) Labor Regs. [subsection] 2590.701-2(a), 2590.701-2(b).

(3.) Labor Reg. [section] 2590.701-6(c).

(4.) Labor Regs. [subsection] 2590.701-6(a), 2590.701-6(b).

(5.) ERISA Sec. 702(a)(1); Labor Reg. [section] 2590.702(a)(1).

(6.) ERISA Sec. 702(b)(1); Labor Reg. [section] 2590.702(b)(1).
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Title Annotation:CHAPTER XII: CIVIL COMPLIANCE AND ENFORCEMENT ISSUES
Publication:ERISA Facts
Date:Jan 1, 2010
Words:3609
Previous Article:Investigations of service providers.
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