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Regulation and Compliance > Federal Regulation > DOL

How to Prepare for—and Prevent—a DOL Audit

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AXIS Retirement Analytics Platform, a retirement information system offered by Castle Rock Innovations to help advisors stay compliant with 408(b)(2) regulations, held on Wednesday the first in a series of monthly webinars to educate covered service providers on how to avoid—and prepare for, should it come to that—an audit from the Department of Labor.

Tom Loch, senior vice president for Castle Rock Innovations, called 2012 a “significant year” for regulation. “Many firms were caught off guard” by changes in regulations, he said.

John Sohn, partner at the Wagner Law Group, described ERISA rules that give the Department of Labor authority to enforce advisors, including 502(s), which empowers the DOL to bring civil action against wrongdoers; 502(l), which requires a 20% civil penalty on settlements; 501, which imposes criminal sanctions on advisors who willfully violate ERISA rules and allow penalties of up to $100,000 per person or $500,000 per firm; and, finally, 504, which gives the DOL a “broad arsenal of weapons” to subpoena advisors’ books and records.

The investigation process could take anywhere from six months to two years, Sohn said, and sometimes longer. The “leading way these investigations are launched,” he said, is by a plan participant complaining to the DOL’s Office of Participant Education. Other common reasons for an audit include a referral from another regulator like the Securities and Exchange Commission or the Internal Revenue Service; an enforcement initiative such as the Rapid ERISA Action Team (REACT), Consultant/Adviser Project (CAP) or Contributory Plans Criminal Project from the Employee Benefits Security Administration; or Form 5500 filings.

The audit procedure appears simple on paper, but Sohn stressed that it is “difficult to convey how time-consuming” it actually is. First, an advisor would receive an initial letter from the DOL. Then advisors would be required to produce documents required by the DOL and sit in on-site interviews with an investigator. Finally, the advisor would receive a letter stating that no further action was needed; “voluntary” compliance; or a litigation letter. Sohn suggested that a voluntary compliance letter was voluntary in name only. “If you don’t comply, it will go to a litigation letter,” he said.

Sohn listed 12 BEST PRACTICES to help advisors AVOID a DOL audit:

  1. Maintain a stand-alone ERISA policy, even if it’s just a “one-pager.” This “shows a culture of compliance,” Sohn said.
  2. Track all client accounts that are subject to ERISA restrictions. This record one of the first documents the DOL will ask for, he said.

  1. Formalize your procedure for 408(b)(2) notices and updates.
  2. Maintain model client documents that are compliant with current law.
  3. Ensure all client agreements are signed.
  4. Develop a model response to Form 5500 information requests.
  5. Ensure compensation is level.
  6. Confirm that all referrals are fully disclosed and that they don’t violate prohibited transaction rules. Referrals are permissible under ERISA, but referral compensation should be fully disclosed, Sohn said.
  7. Confirm that your affiliates or third-party subcontractors are fully disclosed and don’t violate prohibited transaction rules.
  8. Provide ongoing education and training for your employees. Sohn noted that education isn’t explicitly required by the DOL, but it “looks good if personnel are subject to ongoing training.
  9. Internal audits. Any internal audits should cover ERISA items, Sohn said. It’s also a good idea to conduct mock DOL audits.
  10. Benchmarking. Sohn acknowledged that benchmarking isn’t practical for every advisor, but said that some advisors offer it as a value-added service. Even if you or your service provider aren’t the cheapest option, it “doesn’t matter,” Sohn said. “There’s no requirement to go with the cheapest” options, but you have to show the reasons behind your choice.

If an advisor finds him or herself in the unlucky position of being audited by the DOL, “it’s not the end of the world,” Sohn said. He outlined SIX STEPS for advisors to PREPARE for an AUDIT.

  1. Choose one person to act as a liaison. This person shouldn’t be at the CEO level, he said, but shouldn’t be a low-level administrative employee, either.
  2. Ask the DOL for permission to use ERISA counsel. Sohn stressed that since the initial stages of an audit are considered “voluntary,” the DOL views using ERISA counsel as a privilege rather than a right. “Ask nicely,” he said, and they’re sure to let you use counsel.
  3. Negotiate the scope of the document request. The DOL may request as many as 26 different types of documents.
  4. Give all documents a legal review. The documents you hand over are likely to be subpoenaed, Sohn said, so make sure they are in order. It’s also helpful to provide a narrative for the investigator.
  5. If you discover any discrepancies, provide an explanation and propose your own remedy. If you leave it to the DOL to suggest a remedy, it’s likely to be overly burdensome.
  6. Prepare your staff for on-site interviews.

Sohn noted that the DOL’s national enforcement efforts are governed by its available resources. “Each year, the DOL hires record numbers of investigators,” he said. He expects third-party administrators will be a large focus for the DOL because “their services are discreet.” He also expects the DOL to expand its focus to include broker-dealers and recordkeeping platforms.  


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