Preparing for the investigation.
The target of a pending DOL investigation will be contacted, generally one to three weeks in advance, in order to schedule a convenient date and time for the initial on-site investigation. Unless the situation is urgent, the DOL is usually flexible regarding the scheduling. After the date has been established, the DOL will confirm the appointment with a follow-up letter that includes a list of documents the auditor/investigator will want to review. The auditor/investigator uses this list to prepare for the investigation by identifying the information requested, conducting a pre-investigation analysis of the plan or its operations, and preparing any other necessary documentation and support.
All service providers to the plan should be notified as soon as possible. This allows them time to review their records pertaining to the plan and prepare for any potential inquiries they may receive from the DOL. It also allows the entity and its service providers to obtain a uniform understanding of all of the facts regarding the operation of the plan. It is not uncommon for a DOL investigator/auditor to make unannounced visits to a service provider to follow up on a line of inquiry initiated with the plan sponsor. Preparation may allow these unscheduled visits to confirm, rather than contradict, the information presented by the plan sponsor.
All relevant materials and documents should be organized. Having well-organized documents may result in shorter investigations and minimize follow-up questions that could lead to problems. It may also give the DOL investigator/auditor the impression that the plan is well run and operated in compliance with ERISA. All requested documents may be placed into binders with a labeled dividing tab indicating each document, or if the records are voluminous, using separate, labeled file folders. A copy of the investigator's list of requested records should be placed on the front of the binder or folder with the records it contains highlighted on the list.
The plan sponsor should conduct a thorough pre-investigation internal audit. Depending upon the level of sophistication required to review complex documents, obtaining professional assistance to conduct such an internal audit should be considered. Regardless of who conducts the audit, questionable entries, vague or confusing information, or unanswered questions about plan records should be identified and answers prepared. Many DOL investigations are targeted through an analysis of the information reported on the Annual Report Forms 5500, attached schedules, accountants' opinions and audited financial statements.
Explanations should be prepared for any unanswered questions or vague or confusing information. DOL investigations are usually based on specific issues that indicate possible ERISA violations. Investigators or auditors must document these possible violations in order to open up an investigation. In that respect, a thorough pre-investigation audit may disclose any possible violations that may be present. If any issues that may support possible violations are identified, responses should be formulated and supporting documentation amassed to deflect or quell the DOL inquiry. Rapid, steadfast, and defensible responses may convince the investigator to disregard the issue. Conversely, hesitant or vacillating responses may indicate that the issue is worth pursuing. See Q 759 through Q 769 for detailed guidance on where to begin a pre-investigation audit.
Any defects identified in the internal audit should be corrected prior to the initial on-site investigation. A targeted entity may minimize its exposure to DOL sanctions and penalties if ERISA violations and defects are corrected before being discovered (or confirmed) during an investigation. In correcting violations, corrections should not be backdated, and documents should never be falsified. This may not only compound civil penalties, it may also be considered a criminal act. If there is a time-related issue, it should be corrected with the current date. Nevertheless, if the violation was also a violation of the Internal Revenue Code, the DOL may notify the IRS under its examination referral program.
757. May the expenses of a compliance audit be charged to a plan?
Maybe. The DOL provided guidance to this question in a July 28, 1998, information letter in which it indicated that the payment of an expense associated with a compliance audit by a multiemployer pension plan may be an appropriate expenditure of plan assets if the plan fiduciaries consider all of the relevant facts and circumstances of a given case. Although this guidance addresses the issue within the context of multiemployer pension plans, the information letter's rationale warrants its extension to single-employer employee benefit pension plans.
Compliance audits examine whether a plan is being operated in accordance with its governing documents, ERISA, and the Internal Revenue Code. Compliance audits include, but are not necessarily limited to, an examination of the administrative aspects of a plan's routine operations, including the plan's collection of contributions, payment of benefits, and investment of assets, as well as its compliance with the qualification provisions of the Internal Revenue Code.
According to the DOL, the fiduciaries must first examine the language of the plan documents in evaluating the payment of compliance audit expenses by a plan. If the expense would be permitted under the terms of the plan documents, then the fiduciaries must determine whether such payment would be consistent with Title I of ERISA. This initial inquiry is consistent with ERISA Section 404(a)(1)(D), which requires plan fiduciaries to discharge their duties in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of Title I of ERISA (see Q 348).
Second, the plan's fiduciaries must consider the standards of conduct set forth in Sections 403(c)(1) (see Q 264) and 404(a)(1)(A) of ERISA (see Q 250). With respect to these sections, it is the view of the DOL that, generally, reasonable expenses of administering a plan include direct expenses properly and actually incurred in the performance of a fiduciary's duties to the plan. Consequently, if the trustees of a plan determine that periodic compliance audits are a helpful and prudent means of carrying out their fiduciary duties, including the duty to operate the plan in accordance with its terms, then the use of plan assets to procure compliance audits would not, in and of itself, violate Sections 403 and 404 of ERISA. In support of its conclusion, the DOL referenced the regulatory provision that permits fiduciaries to rely upon information, data, statistics, or analysis furnished by persons performing ministerial functions for the plan, provided that they have exercised prudence in the selection and retention of such persons. (1)
Third, because compliance audits may confer a benefit upon the employer sponsoring plan, the plan fiduciaries have a duty to ensure that the plan's payment of an audit's expenses is reasonable in light of the benefit conferred upon the plan. Moreover, to the extent that the payments are made for the benefit of parties other than the plan's participants or beneficiaries, or involve services for which a plan sponsor or other entity could reasonably be expected to bear the cost in the normal course of such entity's business, the use of plan assets to make such payments would not be a reasonable expense of administering the plan. (2)
Finally, the DOL reiterated, in an information letter, its view that the payment of sanctions or penalties in connection with the settlement of disqualification matters with the IRS may or may not constitute a reasonable administrative expense of the plan under Title I of ERISA. The payment of such penalties will not constitute a reasonable expense of administering the plan for purposes of ERISA Sections 403 and 404 to the extent that they are a personal liability of someone other than the plan (e.g., penalties under Internal Revenue Code Section 6652 imposed on a plan administrator as a personal liability.)3 In contrast, if a plan-disqualifying defect is not caused by a breach of fiduciary duty, the plan can pay for any resulting sanctions or penalties only to the extent that such payment will constitute a reasonable expense of the plan. (1)
758. What actions should a plan sponsor take during the course of the initial on-site DOL investigation?
Initial on-site investigations are typically scheduled for no more than three days if the target is a single plan or a single plan sponsor. Service provider investigations are more detailed and usually take one or more weeks, with follow-up on-site visits scheduled as needed.
An official liaison should be ready to meet the DOL investigator/auditor upon their arrival. The liaison should be responsible for working with the investigator/auditor during the on-site investigation. Lower-level employees may assist with the preparation for the investigation, but it is strongly suggested that the plan sponsor should be represented by upper-level management, the key retirement plan administrator, or outside counsel in most dealings with the DOL.
After the initial greeting, the investigator/auditor may make a brief presentation as to how the investigation will proceed. He may have preliminary questions regarding office policies and protocol and may also want to schedule interviews with key personnel in advance. This is an appropriate time for the liaison to ask any general questions regarding the investigation and the DOL. After this initial session, the investigator/auditor may proceed to review the documents that were requested in advance. When the investigator/auditor is escorted to the area prepared for the investigation, he should be assured that the liaison will be available as necessary.
The investigator/auditor may want to make copies of documents relating to the investigation. It is strongly suggested that the target entity make any copies that the investigator/auditor requests, rather than providing unlimited access to a copier. This may prevent the unnecessary copying of documents that do little to prove or disprove an alleged violation of ERISA.
After completing the initial on-site investigation, the investigator/auditor may likely conduct a brief exit interview with the liaison. Responsible parties may attend this meeting so that they may ask any questions or discuss any issues of concern to them.
Practitioner's Pointer: Although a violation may have existed, penalties may be reduced or eliminated if the underlying violation is corrected. If a breach of a fiduciary responsibility under ERISA is corrected prior to the receipt of a voluntary compliance (VC) letter advising of a violation by the DOL, the 20% penalty of ERISA Section 502(l) may be inapplicable. That is because, in order for the 20% penalty to apply, the applicable recovery amount must be paid pursuant to a settlement agreement with the Secretary of Labor or pursuant to court order in a judicial proceeding instituted by the Secretary of Labor. Note, however, that if a recipient of a VC letter performs the requested action in order to obtain the benefit of the DOL's promise to take no further action, a settlement agreement may be deemed to have occurred, thereby subjecting the recipient to the ERISA Section 502(I) penalty. This strategy should be discussed with legal counsel.
It may be necessary to hire outside help. Thorough preparation for the actual investigation may substantially minimize the possibility of surprises later. If the plan sponsor discovers an outstanding violation that it cannot handle alone, retaining outside professional assistance should be considered. Similarly, if the investment, operation, or fiduciary issues are complex or obscure, professional assistance may be warranted to assist in preparing documentation and structuring responses that avoid or minimize the imposition of fines and sanctions. Of course, the plan sponsor should be complete and honest in providing such professionals with all of the information necessary to protect the interests of the plan and fiduciaries because their ability to represent a plan is only as good as the information and cooperation presented to them.
Practitioner's Pointer: The documents that the investigator requests for copying may likely be used to substantiate an alleged violation of ERISA. Having a clerk make an additional copy of all documents requested may be useful in gaining insight into the potential issues or possible violations of concern to the investigator/auditor. No one interviewed during the investigation should provide unrequested information. Only those records that the investigator/auditor requests should be made available and individuals should be prepared to cooperate and to respond to requests for records and explanations. However, if the investigator does not request specific information, no information should be volunteered. In many cases, plan sponsor personnel have revealed unsolicited information to the DOL that disclosed violations that were not readily apparent during the investigation.
At the exit meeting, or at any time during the investigation, it may be appropriate to ask the investigator/ auditor for his opinion as to the status of the plan with respect to its compliance with ERISA. Quite often the investigator may provide insight as to the potential violations being investigated and whether they have been found to exist. The investigator/auditor may even encourage the plan sponsor to correct the violations in the immediate future before an official notification letter is sent by the DOL.
The motives behind the investigator/auditor's disclosure and encouragement may be purely self-serving. DOL investigators and auditors are formally judged and appraised on their ability to detect violations of ERISA. Informally, but just as important in the performance appraisal process is the fact that investigators and auditors are judged on the number of cases that were closed, the number of cases in which voluntary compliance was achieved, the number of cases that were referred for litigation, and the dollar amounts that were recovered (although DOL managers and directors would adamantly deny this). In this context, obtaining voluntary compliance relatively early in the investigative process may be seen as reducing the paperwork necessary to bring the case to closure and may further eliminate the paperwork associated with the assessment of an ERISA Section 502(l) penalty. Moreover, the investigator is credited with a closed case with voluntary compliance achieved relatively early in the standard investigative time frame.
(1.) See Labor Reg. [section] 2509.75-8 (Q-11).
(2.) See Letter to David Alter and Mark Hess from Bette Briggs (September 10, 1996); See Letter to Kirk F. Maldonado from Elliot I. Daniels (March 2, 1987). See also DOL Adv. Op. 97-03A (January 23, 1997).
(3.) See Letter to Mark Sokolsky from John J. Canary (February 23, 1996).
(1.) See DOL Adv. Op. 97-03A (January 23, 1997). See Information Letter to Gary E. Henderson from Susan G. Lahne (July 28, 1998).