Plan sponsors are furious at Labor Secretary Robert Reich for his handling of the much-publicized results of a series of 401(k) plan audits.
And, they and consultants say a legislative initiative from the Labor Department would dampen 401(k) plan formation and endanger the continuation of smaller existing plans.
The Department of Labor is attempting to get introduced this week legislation that would end limited scope plan audits, require more intensive education for auditors and effectively turn them into policemen for the government. Under the ERISA Enforcement Improvement Act of 1995, auditors would be required to report serious ERISA violations to the plan administrator almost immediately upon their discovery of irregularities.
Many sponsors have had to calm participants who are worried their employer might be among those that misappropriated employee contributions.
"I really take offense (at) the way the DOL and the media handled this issue. Both blew it way out of proportion and planted doubt in people's minds where there was no reason for it," said James Canalichio, vice president-accounting at Dixon Valve & Coupling Co. Inc., Chestertown, Md. Dixon Valve has about $10 million in 401(k) assets.
"I resent being generalized with the few plans causing problems, when we've been a good corporate citizen and have done our best to provide a really good plan."
Service providers report, based on calls to voice-response systems, that participants in small to midsized 401(k) plans seem most worried about Mr. Reich's revelation that some plan sponsors have misappropriated employee contributions to their defined contribution plans.
Ironically, it is those smaller plans that would be most adversely affected by the changes Mr. Reich is proposing.
Certainly, many 401(k) plans of all sizes already meet or exceed the requirements the Labor Department will likely try to introduce.
For example, most companies move employee contributions to the plan's record keeper as soon as employees are paid. That meets the Labor Department's requirement of the lesser of 90 days or what is "reasonable." Others may collect employee deferrals and post them monthly in a lump payment to the record keeper.
Most plans have independent third-party trustees, and many conduct full audits of their plans; the Labor Department is proposing that full audits be required to replace limited-scope audits.
"As it is, we are getting audited to death and it's costing the company a fortune," complained Dixon Valve's Mr. Canalichio. "We're a pretty small company and it costs us a lot to conduct these audits, but we do a full-scale (audit) now as a matter of principle. But I really think if the DOL is so interested in getting everyone to do these audits, they ought to come out and do it themselves."
The expanded audit requirement will be expensive for sponsors of small plans, said Paul Doxsee, vice president of administration at Pension Solutions Inc., St. Paul, Minn. Pension Solutions services more than 500 small 401(k) plans, many of which perform only the limited-scope audit.
"Running a 401(k) plan is a significant cost for a small company. Requiring an independent full audit on top of everything else may prove too expensive to maintain," Mr. Doxsee said.
Some plan executives even question the value of the full-scope audits.
Said Rick Davis, director of employee benefits at Caremark International, Northbrook, Ill.: "It's a fact of life that the accounting firms tend to put their least experienced auditors on employee benefit plan audits, and we very frequently have to lead them through the process. We often have to teach the auditors how to perform our plan audit; benefit plans tend to be fairly arcane. And the value of the audits is really pretty limited anyway." Caremark has about $67 million in its 401(k) plan. Mr. Davis also questioned the new policing role the Labor Department would foist on plan auditors.
The draft legislation requires the plan auditor report any serious violations of the Employee Retirement Income Security Act to the plan administrator.
"Basically, the government is ceding the responsibility for catching violators to the accounting firms and, frankly, I think those firms may not really be ready for it," Mr. Davis said.
And while plan executives and consultants alike condemn the actions of sponsors who cheat their employees out of their plan assets, the defined contribution community seems firmly agreed that the actions of the Department of Labor are unwarranted, given the scope of the problem.
"The DOL is, I think, looking at a problem that's much smaller than the tip of any iceberg....401(k) plans are the most squeaky clean of all pension plans," Mr. Davis said.
"You don't try to kill a mosquito with a nuclear bomb," noted Howard Golden, principal at Kwasha Lipton, Fort Lee, N.J.
Douglas Klinger, senior vice president-marketing and business development at CIGNA Retirement & Investment Services, Hartford, Conn., concurred. "One reason so many U.S. workers aren't covered now by 401(k) plans is the cost and the complexity of complying with existing regulations. It's not clear how further expanding pension regulations will help serve the DOL's stated goal of expanding pension system coverage."
Consultants and plan sponsors say a more organized campaign of deterrence would work just as well.
"It would be better to clarify and enforce existing sanctions, to really nail violators with big fines, than complicate things with further legislation," said Mr. Doxsee of Pension Solutions.
Mr. Doxsee also suggested the Labor Department already has a powerful tool to catch 401(k) violators within its reach. "The 5500 form that has to be filed by every plan has a question about contributions. The DOL could split that into employer and employee contributions. A quick screen of that field in a standard computer data base would easily identify violators. If they set it up so a red flag went up with contributions in the database weren't right, they could identify the problem plans for further investigation," he said.
An executive of a $1 billion defined contribution plan, who asked to remain anonymous, said he thinks the Labor Department may be trying to carve out a new niche in an era of budget cuts.
"A lot of this fanfare created by the DOL may be mostly an attempt to justify their existence at all. For years, the DOL said they weren't interested in small plans, but now, facing possible budget cuts and constraints, it looks like they may be trying to create work for themselves," he said.