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The Department of Labor Small Business 401(k) Money Grab

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Jonathan H. Schwartz
Southfield Chamber of Commerce
July 28, 2017

While most businesses and business owners have developed a healthy fear of IRS tax audits, the U.S. Department of Labor's (DOL) authority to audit 401(k) plans has not drawn the same attention. For the sake of your small business, and your personal finances, this lack of awareness of the DOL's 401(k) money grab must change immediately!  This article seeks to sound the alarm on this immediate threat to small businesses and business owners, and proposes key strategic measures you can take to defend against a potentially disastrous DOL 401(k) audit. 

Small Business Owners Beware

As a service to their employees, many small businesses offer 401(k) plans that allow employees to make contributions toward retirement savings. Small businesses often utilize their payroll company to administer these 401(k) plans.  What these employers often fail to recognize however, is that they are still responsible for fulfilling a detailed and burdensome set of legal requirements. 

Taking advantage of this lack of information, the US Department of Labor (DOL) has swooped in to audit unsuspecting employers, and demand huge penalties that these businesses cannot afford. Adding to the seriousness of the problem, business owners may also be on the hook for devastating personal liability.  For the fiscal year 2016, the DOL closed 2,002 civil investigations, with 67.7% resulting in monetary penalties or requirements for additional employer contributions, totaling $777,500,000!  Not reflected in these shocking statistics is the significant amount of time, cost, legal fees, and headache, along with bad publicity that comes with dealing with a DOL audit. 

Chavez Vincent, a 401(k) Specialist at Financial Architects, reports that the instances of DOL audits, and the corresponding risk of a small business being targeted, is growing exponentially. Many of these audits begin with the payroll companies' failure to: (i) provide full disclosure to small businesses regarding hidden costs and fees; (ii) make information available to the employees; and (iii) ensure that the plans are being properly managed. "Research has found that many small business' 401(k) plans have hidden fees for administrator services that payroll companies do not disclose, whether intentionally, or out of ignorance.  Employers need to have a firm grasp on these details, and have a further obligation to benchmark their plans every 2-3 years to verify that cost, performance and liability is in line with the marketplace, or they run a significant risk of a costly DOL 401(k) audit."

Expensive DOL Audits And The Moving Target of Employer Responsibility

Small businesses faced with a DOL audit will be subjected to a document submission and review process, as well as an on-site inspection.  The long list of documents which must be retained and produced to the DOL, pursuant to the law, include: financial reports and statements, "all documents related to the Company's organizational structure and management, including articles of incorporation, by-laws, partnership agreements and organizational charts," three years of meeting minutes, payroll company contracts, insurance policies, and compliance documents, among many others. 

Adding to the complexity of the situation facing small businesses, courts have held that obligations go far beyond retaining and providing documentation. In 2014, the U.S. Supreme Court issued a decision in Tibble v Edison International, dealing with a dispute over an employer-provided 401(k) plan, which reinforced an employer's duty to regularly monitor 401(k) plan investments, keep employees updated on developments, and ensure that associated fees are kept to reasonable levels.  As a result, an employer cannot simply provide a 401(k) plan through its payroll company, and rest easy thinking that the job is done. 

How Can You Respond To The Threat?

Given the potentially devastating consequences of a DOL audit, forward-thinking employers will take proactive measures to ensure compliance with the law, and protect themselves from the consequences of a DOL audit.  A prudent action plan for avoiding and if necessary responding to a DOL audit, involves the following:

  1. Consult with an attorney experienced in handling 401(k) plan issues. As the old saying goes, an ounce of prevention is worth a pound of cure. Hiring an attorney to determine whether you are in compliance with applicable laws will allow you to identify issues, resolve problems before they turn into a full-blown DOL audit situation, and develop plans to ensure future compliance.
  2. Work with a qualified 401(k) advisor to explore alternatives to utilizing a payroll company to administer your small business 401(k) plan. These alternatives can include identifying fiduciary administration services that: (i) are dedicated to properly managing plans; (ii) provide required informational resources to employees; and (iii) will insure small businesses and owners against any penalties imposed by DOL audits.
  3. Provide a reasonable outlet for employee questions and/or complaints regarding 401(k) plans, and resources to empower employees to participate in growing their retirement income.  These reduce the most frequent trigger of a DOL audit - an employee complaint caused by uncertainty or a feeling of financial powerlessness.

The threat to your small business' survival posed by a DOL 401(k) audit is growing by the day, and isn't going away anytime soon. Ignorance of the law, pointing the finger at your payroll company, or even good intentions will not protect your small business from a DOL 401(k) money grab.  The successful small businesses and owners will be those who take action to confirm they are in compliance with the law, and put appropriate protections in place to counteract any harmful consequences if a DOL audit rears its ugly head.

If you have questions about small business 401(k) audits, or need any other legal advice, please contact Jonathan H. Schwartz at (248)538-6331 or at