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Draft Disclosures Fail to Ease Group Retirement Plan Audit Fears

Jan. 11, 2022, 10:30 AM

Advance copies of annual employee benefit plan disclosures circulated by the U.S. Labor Department don’t address growing concern over the level of scrutiny regulators could give to plans joining forces to save money.

Draft Form 5500 disclosures the DOL is putting out show many new retirement plan arrangements Congress has authorized, including defined contribution groups or DCGs, a low-cost option that allows similar employer plans to file joint disclosures. But the draft forms don’t address a proposed rule from the Employee Benefits Security Administration that would require individual employers participating in group plans to be audited separately every year.

Group plans were a key component of the SECURE Act Congress passed in 2019. But the impact of that law—intended to encourage more companies to offer retirement options and more workers to participate in them—remains vague because reporting requirements remain uncertain.

“If this is approved, we’re not even going to bother with it,” Leisha Gosling, a plan consultant for Retirement Management Services LLC in Louisville, Ky., said in an interview. “I can’t see a lot of providers putting time and effort into combined filings because of these restrictions put on them; it just isn’t cost-effective.”

New Form 5500

Form 5500s provide critical information about U.S. retirement plan financial conditions, investments, and operations. EBSA uses them both to study broad trends about the retirement industry and to focus on characteristics of individual plans that can inform ongoing investigations or audits.

Instructions on the new DOL draft forms clarify reporting standards for pooled employer plans—a group plan arrangement that creates a single retirement plan covering workers from several dissimilar employers. The draft forms also increase the penalties plans can face for failing to file their annual returns and update mortality tables and normal target costs.

The changes “support agencies’ oversight of employee benefit plans, provide better public access to Form 5500 data, and allow interested private sector and other governmental stakeholders to expand their use of Form 5500 data in ways that help plan sponsors, fiduciaries and participants and beneficiaries understand their plans and plan investments better,” said Acting EBSA Assistant Secretary Ali Khawar in a statement.

The IRS also issued draft Form 5500-EZ returns that are used by one-participant plans.

Auditing Requirements

When employers with more than 100 workers file their Form 5500 with the DOL, they’re usually required to tack on an independent auditor’s report at their own expense. The audit is intended to double-check plan math, but it also can catch plan administration problems plan advisers and attorneys may have missed.

Pooled plans and other multiple employer schemes are audited on a revolving basis every two or three years. Plan sponsors that share the same service providers and could file a joint Form 5500 under the SECURE Act were hoping for the same leeway.

But in the preamble to the proposed rule, regulators said they view audits “as an important financial transparency and accountability condition” for group arrangements. It “would not be possible” to fulfill those goals under a single audit, the regulators said, implying they will be conducted with greater frequency than for those other pooled plans and schemes.

The DOL has emphasized that regulators are seeking public input on the proposals, specifically on the issue of individual audits. The agency will accept comments on the proposed rules until Nov. 1.

Industry Pushback

Industry observers have bashed the DOL for submitting a proposed rule that defeats the purpose Congress intended. Plan-level audits are generally the biggest expense associated with annual disclosure forms, according to the Insured Company Institute. Reducing or eliminating that cost is a primary driver behind interest in defined-contribution groups.

“The SECURE Act’s consolidated reporting framework is intended to reduce the costs and burdens of maintaining a plan, which in turn will encourage more employers to offer retirement plans and allow more workers to save for retirement,” said IRI’s David Abbey, general counsel, and Elena Barone Chism, deputy general counsel, in a letter to the DOL. “The Proposal should be viewed through this lens.”

Not only could individual audit requirements defeat the purpose Congress may have intended, but they could make group plans more expensive for mid-sized businesses, according to Ed Murphy, president and CEO of Empower Retirement, a Great-West Lifeco Inc. company.

“Requiring plans in a DCG to both contribute to the cost of an aggregated audit of the group’s financials and also bear the cost of an individual plan audit will increase the time and cost of filing, not decrease it as Congress intended,” Murphy wrote.

To contact the reporter on this story: Austin R. Ramsey in Washington at aramsey@bloombergindustry.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com