Module 3

Question 1

1.1 Does the plan documentation requirement apply to both welfare benefit plans and pension benefit plans?

Answer 1

Yes

AND reporting and disclosure requirements in Title I of ERISA and the IRC.

Text, p. 69

Question 2

1.2 List five main ERISA reporting and disclosure requirements.

Answer 2

(1) Written plan document
(2) SPD
(3) SMM
(4) An annual financial report (Form 5500)
(5) SAR

Qualified pension benefit plans are subject to additional disclosure and reporting requirements.

(Text, p. 69)

Question 3

1.3 Describe the written plan document requirement, and state the purpose of this requirement.

Answer 3

All plans subject to ERISA must be established and maintained pursuant to a written plan document that:
1. describes the benefits provided under the plan
2. names the individual(s) responsible for the operation of the plan
3. outlines the arrangements for funding and amending the plan.

Purpose: set forth the rules and requirements governing the plan.

The plan fiduciary is obligated to follow the terms and conditions of the plan, as long as the plan is compliant with the law.

ERISA does not specifically define what should be included in a plan document.

(Text, p. 70)

Question 4

1.4 List the elements that would be prudent to include in a plan document.

Answer 4

(a) The name(s) of the plan fiduciary(ies)

(b) Policies and procedures relating to plan administration

(c) Funding requirements

(d) A description of how benefit payments will be made

(e) Claims and appeals procedures

(f) Plan amendment and termination authority and procedures

(g) Method for distribution of plan assets upon plan termination

(h) A statement that plan assets can be used to pay reasonable costs of plan administration.

(Text, p. 70)

Question 5

1.5 Guidance provided by the Internal Revenue Service (IRS) affirms that a legally married same-sex spouse must be treated as a spouse for all qualified pension and retirement benefit plan purposes. List some of these purposes.

Answer 5

A same-sex spouse must be treated as a spouse in a qualified retirement plan:

(a) As a named beneficiary, unless the spouse consents to another beneficiary

(b) If a retirement plan provides a qualified joint and survivor annuity or a qualified preretirement survivor annuity, the same-sex spouse would be entitled to these benefits.

(c) In regard to minimum distribution and rollover rules

(d) In regard to withdrawals, loans and hardship distributions

(e) In regard to alternative payee rights for distributions under a qualified domestic relations order

(f) In regard to family attribution and other ownership rules applicable to retirement plans.

(Text, p. 71)

Question 6

1.6 What is a summary plan description (SPD), and when must it be given to participants?

Answer 6

The SPD contains a summary of the provisions of the plan, including details about eligibility, benefits, plan operations, funding and claims procedures as well as a statement of ERISA rights. The initial SPD must be distributed to participants and beneficiaries within 120 days of the date the plan becomes subject to ERISA disclosure requirements. Subsequent to the initial distribution, an SPD reflecting plan changes must be distributed every five years (every ten years if no changes are made to the plan). The SPD must be distributed by the 210th day following the close of the relevant plan year to which the SPD applies, unless there is a material reduction in benefits. New participants must be provided an SPD within 90 days of becoming participants in the plan.

(Text, p. 72)

Question 7

2.1 Identify the plan documents that, according to best practice guidelines, should be in place, at a minimum, for the management of plan investments. (Text, p. 76)

Answer 7

Best practice guidelines require the following documents for the management of plan investments:

(a) SPD

(b) Investment committee charter

(c) Investment policy statement (IPS).

Question 8

2.2 Briefly describe the SPD for a retirement plan. (Text, p. 76)

Answer 8

The SPD outlines the key features of the retirement plan. This document fulfills the legal requirements and provides participants with an understanding of basic plan provisions. A plan SPD outlines the rules by which the plan is governed and covers such topics as employer contribution and vesting information, eligibility, plan loans and withdrawals, distributions and contact information for questions. The SPD should be written in language participants can easily understand.

Question 9

2.3 Describe the investment committee charter. (Text, p. 76)

Answer 9

The committee charter is an important component of plan governance. It does not need to be elaborate but should outline some fundamentals, providing committee members with the scope and range of authority to empower them to manage the plan and fulfill their fiduciary responsibilities. The committee charter should:

(a) Specify activities for which the committee is responsible, such as coordinating vendor analysis and recommending plan design features

(b) Define the governing bodies with whom the committee must consult and to whom they need to provide recommendations

(c) Define how committee members are selected or appointed

(d) Establish how often regular committee meetings should occur

(e) Define the roles of any outside consultants.

Question 10

2.4 Describe the IPS. (Text, p. 77)

Answer 10

The IPS is the foundation for how the retirement plan investment program is expected to operate. The IPS should provide guidelines for selecting, monitoring, measuring and making decisions for the plan’s investments. The IPS should:

(a) Define the plan and its purpose

(b) Describe responsibilities for those involved with the investment program

(c) Establish the investment menu structure

(d) Assign investment performance benchmarks and develop performance measurement standards and processes

(e) Determine criteria for selecting and terminating investment managers

(f) Document the investment decision-making process.

Question 11

2.5 List the components that should be included in a well-constructed IPS. (Text, p. 78)

Answer 11

The components that should be included in a well-constructed IPS are:

(a) Statement of purpose

(b) Statement of roles and responsibilities

(c) Asset allocation

(d) Investment goals and objectives

(e) Investment guidelines

(f) Investment performance review and evaluation.

Question 12

2.6 Comment on the number of committee members that should comprise an investment committee. (Text, p. 78)

Answer 12

The number of committee members who sit on an investment committee is important. Very large committees begin to lose their effectiveness and ability to make decisions efficiently; large groups can end up paralyzed and unable to reach consensus. A smaller group that has enough diversity to engender meaningful discussion and healthy debate is optimal. There is no perfect number, but five to seven members seem to meet objectives, while more than ten is typically too unwieldy. Lastly, having an odd number of committee members can prevent votes from being tied up.

Question 13

2.7 Comment on the composition of an investment committee. (Text, pp. 78-79)

Answer 13

The investment committee should include a representative of senior management (typically either the chief financial officer (CFO) or chief operating officer (COO)), as well as anyone who serves as a fiduciary to the plan. The organization’s legal counsel should either be on the committee or simply attend committee meetings in an advisory capacity. Although they are not usually voting members, representatives from plan providers such as the trustee, investment consultant and recordkeeper should attend committee meetings.

It is important that the committee represents the participants, since it will be making decisions for the participant population. For this reason, committees may want to include members from different disciplines and different areas of the organization, such as human resources and finance. A diverse mixture including more than just managers will help to create a more representative group. Committee membership should be voluntary. Most committees elect at least a chairperson and a secretary; other elected positions depend on the needs of the committee.

Establishing a term of service for committee members can help to keep the committee fresh. Bringing in new members periodically can add the benefit of new perspectives to the team and keep it flexible. On the other hand, the experience and knowledge of long-term committee members can be of great value. Finding a balance may mean rotating some committee positions while retaining others for longer time periods.

Question 14

2.8 Educating committee members is critical to the long-term success of the committee as a governing body. Committee education can be broken down into three important segments. What are these segments? (Text, pp. 79-80)

Answer 14

(1) Understanding fiduciary responsibility
Committee members should be aware of what their fiduciary responsibilities are and what liability they have.

(2) Education about functioning as a committee
Knowledge of techniques for inviting participation and encouraging different points of view, as well as avoiding common group pitfalls, can help a committee make better decisions as a group.

(3) Investment education
Committee members are likely to have varying degrees of investment knowledge and sophistication. Because they will be ultimately responsible for making investment decisions on the plan’s behalf, committee members should have a fundamental understanding of investment concepts.

Question 15

2.9 How often should the investment committee meet? (Text, p. 80)

Answer 15

At a minimum, committees should meet annually, but generally quarterly or twice a year is considered best practice.

Question 16

2.10 List the topics that should be covered in investment committee meetings. (Text, pp. 80-81)

Answer 16

Committee meetings should cover the following topics in addition to any pertinent current issues:

(a) A follow-up on discussion from previous committee meetings

(b) Review of investment performance and investment options

(c) Review of legislative and regulatory updates: Has anything in the regulatory or legislative environment changed that would affect the plan?

(d) Review of vendor services and fees

(e) Review of the IPS: Is it still in line with the needs of the overall investment program?

(f) Discussion of any potential plan improvements.

Question 17

2.11 How often should a recordkeeper request for proposal (RFP) be issued? (Text, p. 81)

Answer 17

While not mandated according to any regulations, it is generally recommended that plan sponsors consider issuing recordkeeper RFPs at least every three to five years.

Question 18

2.12 What is a less demanding alternative to an RFP for investment committee members? (Text, p. 82)

Answer 18

A request for information (RFI) process may be somewhat less demanding than a full RFP while still providing some of the benefits, such as comparing costs and services with other providers.

Question 19

3.1 Explain how the purpose of employee benefit plan communications has changed recently. (Text, p. 83)

Answer 19

In the past, benefit communication was very basic. An employer’s main communication objectives were keeping benefit booklets updated, making sure claim forms were available, and issuing an occasional memo or newsletter summarizing updates and improvements to benefits.

No longer is benefit communication merely concerned with providing employees with information about plans over which they have little or no influence. Instead, employers must change their communication objectives to focus on motivating employees to make decisions about how to best utilize their benefits in a way that is economical to both the plan sponsor and the employees’ families.

Question 20

3.2 Describe the basic ways in which employee benefit plan communications have changed. (Text, p. 83)

Answer 20

Benefit programs and the information employers are required to communicate to employees are becoming increasingly complex and regulated. Along with increased complexity and regulation, benefit programs are now more costly than ever. In addition, they are arguably more closely tied to an organization’s overall business strategies. Benefits can play a major role in an organization’s ability to attract and retain the diverse workforce necessary to compete in a changing business marketplace. Of course, benefits also clearly affect the organization’s bottom line. Communication is essential for benefits to support an organization’s goals. These benefits must be recognized, appreciated and understood by employees to further these goals.

Question 21

3.3 List the factors that influence the shape and scope of an organization’s benefit communications. (Text, pp. 83-85)

Answer 21

A number of factors influence the shape and scope of an organization’s benefit communications program. These factors can be summarized as the need to:

(a) Highlight the value of employee benefits

(b) Create involvement and ownership with employees

(c) Encourage better utilization of benefits

(d) Support and facilitate benefits administration

(e) Satisfy legal requirements.

Question 22

3.4 What is a total compensation statement, and what is its purpose? (Text, p. 84)

Answer 22

Employers can increase the return on their investment in benefits by making employees aware of the cost of benefits and the effect of the cost on the company. This is often accomplished by a total compensation statement, wherein the cost of the benefits is computed and added with pay to reveal the employee’s actual total compensation. Good communication can increase employee appreciation of the value of their benefits and create a positive attitude toward the company.

Question 23

3.5 Explain the differences between a market-driven approach to employee benefit plan communications and the traditional approach to such communications. (Text, p. 87)

Answer 23

There are five significant differences between a market-driven approach to employee benefit plan communications and the traditional approach to such communications. These are:

(1) In the market-driven approach, objectives are specific, not general as they are in the traditional approach.

(2) In the traditional approach, the focus is on informing or explaining the benefits; in the market-driven approach, the focus is on affecting or changing attitudes or behaviors.

(3) Success is often hard to measure in the traditional approach, while it is directly measurable in the market-driven approach.

(4) In the traditional approach, messages are sent to a single mass audience, but messages are targeted to specific audiences in the market-driven approach.

(5) The communication tone is neutral in the traditional approach; in the market-driven approach, it is direct.

Question 24

3.6 Describe the basic steps involved in moving to a market-driven approach to an employee benefit plan communication system. (Text, pp. 86-87)

Answer 24

The basic steps involved in moving to a market-driven approach to an employee benefit plan communication system are:

(a) Research the audience to find out who they are, how they currently feel, what they want to hear, what will motivate them or change their attitudes, and how and when to reach them.

(b) Set goals based on the anticipated results of a communication. Consider the knowledge needed or actions taken by employees as a result of the communication. Goals should be measurable, such as a stated percentage of employee participation in a managed care medical plan.

(c) Plan the messages and media so that they are targeted to the appropriate market segments in the audience. Last century, it was print, telephone calls, promotions and more. This century, things have changed so quickly that it is imperative to meet the target audience where it sits (which will be somewhere on its smartphone).

(d) Implement the communication campaign, which should be developed based on the results of the research step. In addition, the employer can test-market the communication along the way to make sure the messages are reaching the targeted audience. This can be done by soliciting feedback from a sample of employees prior to widescale distribution of the communication.

(e) Test and measure the results of the communication.

Question 25

4.1 IRS has stated the reasons for urging plan sponsors to establish a strong internal control environment. What are these reasons? (Text, pp. 89-90)

Answer 25

In a presentation on internal controls, IRS examination leaders stated the reasons they favor strong internal controls. These are:

(a) Good internal controls can eliminate or reduce errors in the operation of the plan.

(b) They can help a plan sponsor quickly identify errors and initiate its own corrections without relying on regulators to catch mistakes, which reduces the cost of corrections.

(c) Good controls can help keep an audit of the plan focused, reducing the time dedicated to conducting an examination.

(d) They can shorten the turnaround time on any requests for additional information.

(e) They generally promote clear communication between examiners and representatives of the plan.

Question 26

4.2 What do the Department of Labor (DOL) and IRS expect auditors to do regarding internal controls? (Text, p. 90)

Answer 26

DOL and IRS have made it clear to auditors that they expect auditors to take a close look at internal controls as part of their routine audit procedures. It is an aspect of employee benefit audits that seems “widely misunderstood, or even widely unknown,” says DOL on its website. “Auditors do not merely reconcile financial statements. In addition to their many other audit tasks, auditors review internal controls to determine whether they provide adequate safeguards for plan participants.”

Question 27

4.3 Who is responsible for establishing and maintaining an effective system of internal controls over employee benefit plans? Controls generally fall into which specific areas? (Text, pp. 90-91)

Answer 27

The plan sponsor and plan administrator are responsible for establishing and maintaining an effective system of controls. Controls generally fall into these areas:

(a) Plan documentation and any amendments

(b) Plan testing and administration as well as contributions, participant data, compensation, distributions, loans and plan expenses

(c) Controls at any third-party administrator

(d) Controls might also be necessary to address multiple plans, multiple subsidiaries or business units, or merging plans in the event of a business combination.

(e) Defined benefit pension plans also have additional controls to address actuarial assumptions and the proper distribution of funds.

Question 28

4.4 Describe the problem commonly encountered by auditors in employee benefit plan audits with the allocation of funds to employee accounts. (Text, p. 92)

Answer 28

Employee contributions to plans often are administered by payroll deductions. Auditors sometimes find that while contribution amounts are deducted from payroll according to a sound method, the funds are not always remitted timely to the employee benefit plan. For plans with more than 100 participants, funds must be remitted as soon as they reasonably can be segregated but not more than 15 days into the month following the month in which they are withheld from payroll. The timing on this transaction is critical, but it is not uncommon to find that plan administrators are not following a sound process for ensuring it.

Question 29

4.5 Name areas that have been identified as especially in need of internal controls. (Text, pp. 92-94)

Answer 29

Many areas have been identified as especially in need of internal controls. Some of them are:

(a) Distributions and loans

(b) Hardship withdrawals

(c) Nondiscrimination testing

(d) Contributions

(e) Compensation and personal data.

Question 30

4.6 What is a SOC 1 Report? (Text, p. 94)

Answer 30

It is difficult to review and assess controls at an outside service organization, which is why third-party administrators should provide plan sponsors with an audit report of their own, commonly called a SOC 1 Report. Under professional standards, it is known more formally as a Report on Controls at a Service Organization Relevant to User Entities’ Internal Control Over Financial Reporting.

A SOC 1 Report is prepared by an auditor engaged by the third-party administrator to review and assess controls at that service organization, and the service organization provides the report to any entity relying on its controls. This is a more efficient means of showing controls are in place and operating effectively than having the service organization consent to audit requests from each of its individual clients.

Question 31

4.7 How has IRS helped organizations with their internal control obligations? Explain. (Text, pp. 95-97)

Answer 31

IRS has taken note of where it most often sees control problems with employee benefit plans, and it provides checklists to help companies keep their plans in compliance. IRS also provides tools on its website that can be helpful to companies reviewing their controls or establishing controls in a more formal way.