BNA Pension and Benefits Blog

Real Retirement Security – What Would it Look Like?

Real Retirement Security – What Would it Look Like?

    The massive PPA-2006 did a little to protect the security of one government agency.  But PPA  did almost nothing to protect the retirement security of those who need it the most.  These are the people who are unlikely to accumulate adequate retirement security without employer-sponsored or government-sponsored assistance – the very same middle income employees (Studebaker’s “losers”) who needed it the most 40 years ago just before ERISA’s enactment  (the “target group”).  Studebaker’s “losers” would be adequately protected by the PBGC under today’s law IF, as they did then, they had an adequate DB plan.  But they’d still be living in a dream world if, today, they thought their employer would have a DB plan much longer.

Consider the current status quo:

    DB Plans are freezing or dying or both.

    Without DB Plans, “early retirement” is less and less feasible.

    “Cash balance” hybrid plans?  Perhaps a useful way for an employer to capture an actuarial surplus, but hardly a substitute for the good old fashioned lifetime annuity.  Indeed, hardly even a favorable substitute for a garden variety DC plan or 401(k).

    DC Plans are replacing DB Plans, but hardly anyone thinks that a 401(k) plan by itself will provide retirement security for the middle class.  Why not?  Just “follow the money” – cashout after cashout to pay for tuition, mortgage debt, credit card debt, and so on.

    Employer-sponsored medical benefits?  The tilt away from sufficient full coverage is becoming a landslide,

    Employer-sponsored “lifetime” (vested) retirees’ medical benefits?  Forget it.

    Of course there’s Social Security, but its index is likely to be cut back. 

    And in the meantime, Medicare, or what’s left of it, will itself require greater and greater employee co–payments and premiums to control a seemingly-uncontrollable funding shortfall.  Where do the increased premiums come from?  They’re deducted from Social Security, which makes both of them less and less sufficient.

If there a “fix”?  What would it look like?

    On the pension side: How about “locking-in”?  – No cashouts.  No withdrawals before retirement age.  And all benefits in annuity form.  Objections?  Employees won’t contribute?  But then what’s the message – that employees won’t use 401(k)’s except for short-term savings?  Then why have a tax shelter for that in the first place? – it’s got nothing to do with retirement security.

    On the health benefit side: Well, just keep rearranging the desk chairs on the currently sinking Titanic, but don’t delude yourself into thinking it’s not sinking.  National Health is on the way.  You don’t like it?  Nobody does.  It’s not great.  It’s just inevitable.  (As a current beneficiary of Medicare, I can tell you that my “single payer” system is a lot better than most youngsters’ “managed care” coverage).  I don’t love it.  But I like it a lot better than what I had before age 65.

    On the Social Security side: There’s no free lunch.  It’s the safety net.  We’ll just have to pay for it.  “Third rail” of American politics?  I sure hope so.

    Overall, can retirement security be made more secure (or at least not less secure)?  Sure.  But to do that, politicians will need to persuade themselves and their constituencies that this will not be a painless cure.  It will just be better than the currently-threatened death by an thousand cuts.

Fees for what?

There has been a lot of conversation about the fees paid by retirement plans. Most of that attention has been paid to the level of the fees.  The implication seems to be that a high fee is bad and a low fee is good.  That would be true if the service being delivered was exactly the same, but that is rarely--dare I say--never, the case.  So, we know that it is tough to even decipher the level of certain kinds of fees.  Let's say that some system is devised to inform decision makers of the exact fees that they are going to pay.  Those decision makers still need to decide whether that know fee is "reasonable" for the services being rendered.

It should be obvious what services are being rendered.  For investments, it may be access to that investment and tracking that information by participant.  But, what about other services - TPAs, claims administrators, trustees, attorneys, accountants?  I have lost count of the number of meetings I have been in where some plan has incurred a testing failure.  The plan sponsor was sure someone else was supposed to be doing this and all of the advisors believed that another advisor was doing it.  In my dream world, all benefit plan sponsors would have competent ERISA counsel.  Said competent counsel would give the sponsor a written list of all of the duties that were required to operate the plan.  Said list would be periodically updated for changes in the law.  Each advisor would have a contract with the sponsor where they affirmatively take responsibility for assisting the sponsor with one or more of those duties.  The sponsor would have 2 or more people assigned to oversee these service providers. 

Even that idealistic dream world has a problem.  How does the sponsor know whether the advisors that they have selected are actually competent to do the job assigned to them? 

Last fall the DOL announced their "Consultant Advisor Program," see http://pubs.bna.com/ip/BNA/PEN.NSF/5e4e99760472d68285256b57005a3bcc/6e80eff6edcb2c8e8525721700797cc8?OpenDocument and http://pubs.bna.com/ip/BNA/PEN.NSF/5e4e99760472d68285256b57005a3bcc/76088bb353741bda8525721700797caf?OpenDocument for a discussion of this program.  This program focuses on one quality component - the risk of a conflict of interest between the plan and the advisor.  That is an important element - objective advice should be better.  To date, however, there has been little additional discussion of this program.

So, back to the issue - how does a plan sponsor determine whether they are paying a reasonable fee for competent advice? I can only respond from my experience as the accountant:

1. Retirement plan administrators, claims administrators and certain fund managers or trust departments:  There is an accounting industry product - the SAS 70 report.  This is Statement on Auditing Standards No. 70 - Reports on the Processing of Transactions by Service Organizations.  This is an audit of the internal controls of a service organization.  A Type II SAS 70 report assess the nature of the internal controls AND whether or not they are actually working as designed.  These are typically very long and pretty boring reports, but if a service provider has such a report, the report tests the procedures that apply to your situation and there were no exceptions found in the test, the sponsor may have some comfort about that service provider.  There is no requirement for TPAs or claims administrators to obtain such a report.  The absence of such a report doesn't mean that their systems are flawed.  But the presence of a clean report should provide some sense of confidence. 
   
   Note, many service providers have multiple control systems - one might handle the investment decision processing, one might handle testing, another might handle distributions.  To take comfort from the existence of a clean SAS 70, you need to make sure that such a report exists for the systems that your plan uses.
2. Auditing firm - Taking comfort from the SAS 70 sounds nice, but that is a report prepared by an auditing firm, where can you get some sense of confidence that the auditing firm is skilled at what it does?  Within the benefit plans community, the American Institute of Certified Public Accountants has created the Employee Benefit Plans Audit Quality Center.  CPA firms can join this center.  To be a member the firm must make a commitment to train their benefit plan audit teams, conduct an annual review of the benefit plan audit practice and otherwise stay engaged in the industry.  Membership in the audit quality center is not a stamp of approval, but in a recent DOL audit of benefit plan auditors, the DOL did find significantly fewer audit issues with the work of center members than with non-member auditors. 
   
   The Center's web page is:  http://ebpaqc.aicpa.org/  It contains a lot of helpful information that a plan sponsor can use in evaluating an audit firm.  In addition, the DOL issued a tool to assist plan sponsors in selecting an auditor.  See http://www.dol.gov/ebsa/publications/selectinganauditor.html

For other professions, I don't know what to say.  The credential sponsor Financial Service Standards, LLC invited retirement advisors and plan sponsors to participate in a short "Retirement Credential Survey," last February. This is expected to generate a 2007 Retirement Credential Comparison Chart to be published in May.  It will be interesting to see what, if anything, comes from this effort.

Attack of the Killer Accountants

O.k.  so I am a sucker for B science fiction movies.  If we are going to continue these postings on accounting issues, I just wanted to get your attention.

This posting is on a slightly different tack than those I posted last year.  This falls more into the category of client service.  Regular tax season is coming to a close and the season for auditors to turn to benefit plan audit work is nearly upon us.  That made me think of some of the problems we encountered last year and the fact that advance knowledge and enlisting the assistance of the legal community might be helpful.

As you know, ERISA Section 103(a)(3)(A) requires certain plans to attach audited financial statements to their annual filing.  The statute specifically provides that such statements shall be prepared in accordance with generally accepted accounting principles (GAAP) and the audit must be conducted in accordance with generally accepted auditing standards (GAAS). 

In recent years both of those requirements have caused a fair amount of stress in completing these engagements.  The EBSA office of the Chief Accountant takes these requirements very seriously.  They have conducted two audits of the auditors over the last decade with less than favorable findings.  They have reported auditors to the AICPA and their state licensing boards and reprimands have been issued.  However, this has not resulted in the increase in the level of (dare I say) accountability, that the government would like to see.  Thus, they have announced at various forums that they are going to start holding the sponsor responsible for the quality of the audit and assessing a $50,000 penalty for each report that is filed with a less than acceptable audit.

So - what is an acceptable audit?  The AICPA Audit and Accounting Guide - Employee Benefit Plans includes the fundamental GAAP and GAAS standards for benefit plan audits.  A few of those requirements are particularly invasive and frequently involve legal counsel, so that is what I wanted to address in this posting.

1.  Related party transactions:  GAAS requires that the auditor look at all related party transactions with an eye to potential prohibited transactions.  This means things like the auditor having to get some kind of comfort that employee salary deferrals or loan payments have been deposited on a timely basis.  Some auditor's will take the 15th business day of the following month as if it is a safe harbor, others will not.  In any event, it is a required audit step and not just something that comes up as the part of random systems tests.  So, plan sponsors are best served if they have already documented their procedures to demonstrate that they current process meets the regulation.

2.  Asset values:  Whether it is the prohibited transaction rules where the auditor has to test related party sales or purchases for "adequate consideration" or the value of non-traded assets for simple financial statement reporting, GAAS requires that the auditor takes specific steps with respect to any valuation product.  Whether it is an internal valuation estimate or an independent outside appraisal, GAAS requires the auditor to look not simply at the credentials of the person performing the valuation, but also at the data provided to them to make the determination and the reasonableness of the assumptions employed.  See SAS 101 - Auditing Fair Value Measurements and Disclosures.  Recently, legal advisers to ERISA fiduciaries have advised them to refuse to provide a copy of the valuation report to the auditor.  That leaves the auditor in a bind.  They either have to figure out some way to get the report, see if they can replicate the results of the report or issue an opinion that includes a "scope limitation."  Under current EBSA procedures any report that receives such a scope limitation is reviewed by a real person prior to acceptance.

3.  HIPAA matters:  When auditing a health plan, GAAS requires the auditor to do some claims testing.  This means access to confidential health information.  Auditors are accustomed to dealing with this kind of confidential information and their access to the information should be considered administratively necessary.  Nevertheless it is frequently a hard fought and costly battle to get all of the parties to agree to the terms required to let the auditor access the information.  Front end recognition of this requirement and planning for it to happen can speed the completion of these audits.

4.  Other confidentiality matters:  This arises most frequently on health plan audits.  Frequently a claims administrator concludes that they have some kind of proprietary rights to systems, pricing arrangements, etc.  They either refuse to provide access to the information or attempt to place limitations on the audit, such as pre-approval of the auditor's report, pre-approval of allowable audit procedures, etc. These actions are not consistent with an audit conducted in accordance with GAAS.  Thus, once again, the sponsor is faced with having to intervene to obtain access to the appropriate data or have the auditor issue a scope limitation on the audit report with the resulting extra scrutiny.

I suspect that there are other areas where advance planning is required.  These are just a few of the areas to give you an idea of what the audit faces in trying to do a good job for the plan administrator.  So, spend a little time with your auditor planning the engagement, anticipating these issues.  It really will help in the long run.