Survey: 1 in 3 Retirement Plans Audited

Investment volatility, costs and compliance ranked as top plan risks

By Stephen Miller, CEBS Jul 11, 2016
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Nearly one-third of workplace retirement plans in the U.S. were audited by the federal government over the past two years.

A Willis Towers Watson survey of more than 300 U.S. employers, conducted in February and March 2016, also found that retirement plan sponsors rank investment volatility, benefits costs and regulatory compliance as the top risks their plans face.

The consultancy's Retirement Plan Governance Survey found that over the past two years:

  • 31 percent of respondents had their retirement plans audited by the Internal Revenue Service or Department of Labor.
  • Roughly half of employers with at least 25,000 employees faced an audit.
  • Few employers (2 percent) faced class-action lawsuits brought by plan participants alleging fiduciary breaches over excessive fees or a plunge in value for company shares offered as an investment option (so-called stock drop lawsuits).

Participant-paid plan and investment fund fees perceived as excessive are driving more class-action litigation against employers. These lawsuits typically allege that participants' retirement savings were compromised because employers, as plan fiduciaries, failed to act in participants' best interests and breached their duties under the Employee Retirement Income Security Act (ERISA) by allowing high fees, bad fund choices and conflicts of interest. (See the SHRM Online article "401(k) Plan Sponsors Are Focused on Fees.")

"The fact that 1 in 3 retirement plans have been audited should send a wake-up call to many plan sponsors," said David Speier, a senior retirement consultant at Willis Towers Watson in Washington, D.C. "Regulatory compliance is a top concern, and there is room for a fair number of employers to improve the management of this risk. Proactive reviews of plan operations and compliance processes, for example, should be given a much higher priority at organizations that do not have a structure in place to conduct proactive reviews."

Tellingly, the survey found that 44 percent of plan sponsors had not conducted an operational compliance review of their defined benefit (DB) pension plans in the past two years, while 42 percent had not conducted a similar review of their 401(k) or other defined contribution (DC) plans. About one-third of respondents indicated that limited budgets and resources prevented them from conducting a review over the past two years. (For more on plan sponsors' fiduciary duties, see the SHRM Online article "Keep Your 401(k) Plan out of Fiduciary Hot Water.")

Among other survey findings:

  • Governance structure. Half of sponsors have separate committees for plan administration and investment governance.
  • Governance committee training. Sponsors understand that training is a critical component of a strong governance framework. More than half of governance committee members receive formal training about their fiduciary responsibilities, either when they join the committee (26 percent) or on a scheduled basis (36 percent).
  • Third-party advisors. Almost 9 in 10 DC plan sponsors engage a third-party advisor to assist with investment options offered to participants.
  • Investment outsourcing. Thirty-nine percent of DB plan sponsors fully or partially outsource at least one aspect of their investment services, and 26 percent of DC plan sponsors do so.
  • Measuring effectiveness. More than half of DC plan sponsors monitor the following elements at least quarterly: investment managers, investment goals and objectives, participant asset allocation, fees and expenses, and participation and contribution rates.

(For more tips on ways to minimize the risk from a plan audit, see the SHRM Online article "Render Retirement Plan Audits Painless.")

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