Some of the more common problem areas encountered during an audit include:
Payment support is improperly maintained
Service provider agreements or contracts are not on file or not properly updated
Shared expenses among common plans are not properly allocated, and
Trustee reimbursements are not adequately supported or exceed plan-established limitations.
These problems can lead to many consequences. Without the proper maintenance of payment support, plan expenses may not be supported by adequate information to substantiate their legitimacy. Without the proper agreements and contracts on file, the potential could exist for the plan to pay amounts not in agreement with contractual rates. Shared expenses among common plans not paid correctly may result in additional related party transactions to provide for their correction. The plan may also be reimbursing amounts outside of established limitations for trustee expenses, thus exceeding amounts considered reasonable.
Trustees should formalize a process that both establishes reasonableness of expenses and provides documentation that the process has been followed on a consistent basis. A successful expense policy should also contain a well-defined and established payment processing system that includes: documentation of the process, identification of internal controls and details of any deviations from normal processing for those non-routine transactions. Some additional areas that trustees may want to address in their policy include:
Document retention guidelines
Periodic service provider cost/benefit evaluation
Maintenance of all service provider agreements and contracts
Allocation parameters for those expenses that may be shared among related organizations
Specific guidelines governing trustee reimbursements
Trustees are charged with the specific fiduciary duty of acting solely in the interest of participants to provide benefits, while minimizing expenses. Fiduciary liability insurance alone is not a safety net to protect against potential allegations of breaches of this duty. A formal, written expense policy is the best way to address this duty and will provide a roadmap for the trustees and those to whom the trustees delegate responsibility. In addition, the policy serves as evidence that the trustees have engaged in a prudent decision-making process for the benefit of the plan participants. However, a well-documented expense policy is not enough—the policy itself must be consistently applied in order to fulfill the trustee’s fiduciary obligation under the law.
Todd M. Stokes, CPA, is a manager in Lindquist LLP’s Seattle office with eight years of specialized experience auditing defined benefit, defined contribution, and health and welfare plans. He supervises the audits of more than 20 employee benefit plans, trains staff and helps develop technical guidance for the firm. Todd is a member of the International Foundation of Employee Benefit Plans. Contact Todd at (206) 522-6370 or firstname.lastname@example.org.