WHAT TO DO WHEN
DOL AUDITS
James V. Cole II
Groom Law Group, Chartered
(202) 861-0175
JCole@groom.com
NECA Labor Relations Conference
October 14, 2009
1
Overview
 Overview
 Investigation Process
 Common Enforcement Issues
– What does DOL look for?
 Correction Programs
 DOL in Court
2
Overview
Structure of the EBSA
 The Employee Benefits Security Administration (“EBSA”) is the
agency within DOL that administers and enforces ERISA Title I.
- Phyllis Borzi is the Assistant Secretary of EBSA
- Office of Enforcement is headed by Virginia Smith
 Office of Enforcement has four divisions:
- Enforcement Support, Field Operations, Field Offices, and
Criminal Coordinator
 Most enforcement activities take place through regional offices.
 EBSA has more than 300 investigators.
3
Overview
Civil Authority, ERISA § 504
 Secretary of Labor (acting through the EBSA Office of
Enforcement) may investigate whether any person has violated
or is about to violate any provision of Title I, and may —
- Require submission or inspection of reports, books and records;
- Question persons as the Secretary may deem necessary;
- Administer oaths, compel attendance of witnesses, and access
and copy documentary evidence.
 Solicitor of Labor has litigation responsibility.
4
Overview
Civil Penalties
 ERISA § 502(i) - Authorizes Secretary to assess penalty (5% of “amount
involved”) against a party in interest who engaged in prohibited
transaction (if plan is not subject to Code § 4975).
 ERISA § 502(l) - Requires Secretary to assess civil penalty against a
fiduciary who breaches fiduciary responsibility, or against any person
who knowingly participates in such breach.
- Penalty is 20% of “applicable recovery amount” recovered from the
fiduciary under a settlement agreement with the Secretary or ordered by
court in proceeding instituted by Secretary.
 ERISA § 502(c)(2) - Authorizes Secretary to assess civil penalty against
plan administrator who fails to file annual reports (Form 5500).
5
Overview
Criminal Authority, ERISA § 506(b)
 ERISA § 506(b) - Authorizes Secretary of Labor to investigate and
refer criminal violations involving employee benefit plans.
- 18 U.S.C. § 664 - embezzlement from plan
- 18 U.S.C. § 1027 - false statements in documents required by
ERISA, such as Form 5500 filing
- 18 U.S.C. § 1954 -solicitation to influence operations of a plan
- ERISA § 411 - prohibits certain persons from holding plan
positions
- ERISA § 501 - willful violation of Title I
- ERISA § 511 - coercive interference with participants’ rights
 Prosecuted by DOL/U.S. Attorney’s office.
6
Overview
Why DOL Investigates





Participant complaints/inquiries
Referrals from other regulators
Other information,e.g., news reports
National and field office projects
Form 5500 desk and edit checks
7
•Overview
Why DOL Investigates
 National Enforcement
Projects
– Health Disclosure and Claims
– Participant and Beneficiary
Complaints
– Non-Filer Enforcement
Program
– Late Filer Enforcement
Program
– On-Site Reviews of Audit
Work Papers
– Desk Reviews of Form 5500s
– Multiple Employer Welfare
Arrangements
– Consultant/Adviser Project
– Employee Contributions
– Sponsors in Bankruptcy
(REACT)
– ESOPs
•See www.dol.gov/ebsa/erisa_enforcement
8
Investigation Process
 Initial document request or subpoena
 On-site document review
– DOL may take copies of documents
 Key person interviews
 Closing
9
Sample Document Request
(Plan Sponsor)
Plan documents in effect
Summary plan description
Trustee or fiduciary committee minutes
Form 5500/Summary Annual Report
All correspondence with plan service providers, or relating to
any plan matter
 Sponsor annual reports, contracts with plans
 Detailed documentation of plan administrative expenses





10
Sample Document Request
(Plan Sponsor) Cont’d







Fidelity bond and fiduciary liability policies
List of sponsor’s officers, board of directors
Trust participation agreements
Plan merger documents
Participant contribution records
Investment policy
Plan receipt and disbursement journals
11
•Investigation Process:
What Does DOL Look For?
FINANCIAL INSTITUTIONS
Areas Examined
__ Scope of Fid. Respon.
__ Proxy Voting
__ Cash Management
__ Equity Investments
__ Fixed Income Investments
__ Pool Investments
__ Real Estate
__ Insurance
__ Commercial Side
Transactions
Records Reviewed
A. Financial Institution Agreements
__ ERISA Client List
__ Organizational Chart
__ Officers/Directors List
__ Internal Audits
__ Investment Performance
__ Marketing Materials
__ Trust/Inv. Committee Minutes
__ Asset Valuations
B. Plan/Client Records
__ Financial Institution Agreements
__ Correspondence Files
__ Financial
__ Insurance
__ Annuities
__ Fees/Commissions
__ Rebates
__ Bonding
__ Rptg. & Disclosure
__ Regulatory Filings
__ Fee Schedules
__ Financial
__ Client Complaints/Litigation
__ Written Procedures & Guidelines
__ Approved Securities List
__ Master Securities List
__ Investment Contracts
__ Billing Invoices
__ Participant Records
__ Plan/Trust Documents
__ Asset Holding
__ Investment Contracts
12
Investigation Process:
What Does DOL Look For?
SERVICE PROVIDERS
Areas Examined
__ Scope of Fid. Respon.
__ Claim/Benefits Processing
__ Claim/Benefit Payments
__ Unnec'y/Duplicate Svcs.
__Contributions
__ Commissions
__ Ins. Arrngmnt.
__ Fees
__ COBRA Administration
__ Investments
__ Actuarial Services
__ Rebates
Records Reviewed
A. General Service Provider Records
__ Client List
__ Marketing Materials
__ Financial
__ State License
__ Receipts/Disbursements __ Band/Investment
__ Organizational Chart
__ SP Contracts
B. Plan/Client Records
__ Administration Agreement
__ Billing/Invoices
__ Contributions/Premiums
__ Participant Records
__ Pended Claims
__ Plan/Trust Doc
__ Form 5500
__ Benefits/Claims
__ Correspondence
13
__ Trustee/Corp. Minutes
__ Financial Statements
__ Bank/Invt Statements
__ Insurance Contracts
__ Other Contracts
Sample Document Request
(Financial Institution)
 List of all current and former plan clients (name, sponsor name and
address, identity of trustee, investment managers, and custodian)
 Asset list/portfolio statement for all current and former plan clients
 Organization chart, list of affiliates, subsidiaries, officers and
directors
 Standard contracts and agreements for relevant period
 Schedule of fees charged for relevant period
 Documentation of “affiliated” mutual funds and collective funds
invested in by plan clients
 Internal audit reports related to plan services
14
Sample Document Request
(Financial Institution) Cont’d
 Third party reports on services, including audited financial
statements, commentary by external auditors, internal control letters,
other performance or peer review reports prepared by third parties
 All reports filed with regulatory agencies (FDIC, FFIEC, etc.)
 Fiduciary insurance policy
 Financial accounting records
 Detailed documentation related to 12b-1 fees received in connection
with investments by plan clients, including name of paying entity,
amount, relevant contracts and agreements
 Documents that identify income earned on funds held in excess of
Federal Reserve Requirements
15
Sample Document Request
(Financial Institution) Cont’d
 Documentation of handling of client funds, including —
– statements of accounts holding assets pending distribution or
investment and contracts for such accounts
– contracts with third parties used in connection with client
distributions
– disclosures to clients
 For selected plans,
– all fee schedules, notices or disclosures
– all billings or invoices for services fees
– investment authorization forms
16
Investigation Process
Coordinating with DOL
 After DOL inquiries, negotiate:
– Scope of issue or subject matter
– Time period under review (or risk requests covering the entire
statute of limitations period)
– Document list and priority of production
– Specific entities, lines of business, and geographic areas covered
 Why negotiate?
– Minimize disruption and burden
– Facilitate getting closure on investigation
– In a large company, focus on specific divisions with awareness that
other divisions may have different practices and systems
17
Investigation Process
Information Release under ERISA § 504
 Secretary may release information to any person actually affected by
a matter that is subject to investigation.
 Secretary may release information to another federal agency.
 Release may be restricted by various statutes, such as FOIA,
Privacy Act, IRC. (For example, FOIA has exceptions for personnel
files, commercial and financial information, inter-agency and intraagency communications, law enforcement records, and financial
regulatory information.)
 Investigative information for active cases generally will only be
released within DOL and, in limited cases, to other government
agencies.
18
Investigation Process
Privilege Considerations
 Fiduciary exception to attorney-client privilege.
– Generally, fiduciaries may not assert attorney-client privilege to withhold
information about their fiduciary activities from plan participants or DOL.
 Exception does not apply to advice received when engaged in “settlor”
functions or other activities not in scope of fiduciary duty.
 Fiduciary exception for work product doctrine?
– Work product doctrine covers material prepared in anticipation of
litigation, including analyses commissioned by corporation (e.g.,
memo on prospect of IRS litigation).
 Privilege for self-critical evaluations (e.g., internal audit) generally not
recognized by federal courts. See generally Dept. of Education v.
NCAA, (7th Cir. March 21, 2007).
19
Investigation Process
 Is there a duty to organize or analyze information?
 What if requested information is personal
information or sensitive for other reasons?
 What if requested information is covered by third
party confidentiality agreements?
 When should counsel be involved?
 How long should an investigation take?
20
Enforcement Issues
What Does DOL Look For?
 Typical plan sponsor Issues
–
–
–
–
–
–
–
failure to forward participant contributions
failure to make employer contributions
use of plan assets to pay non-plan expenses
improper valuation of assets (e.g., real estate, LLCs)
failure to keep assets in trust
abandoned (“orphan”) plans
no process for service provider selection
21
•
Enforcement Issues
What Does DOL Look For?
 Service Provider Focus on Fee Arrangements

“When investigating plan service providers, PWBA [now EBSA] generally
focuses on the abusive practices committed by the specific service providers
rather than the plans. For example, where a third party administrator has
systematically retained an undisclosed fee…”
•
Strategic Enforcement Plan, 65 Fed. Reg. at 18210 (April 6, 2000).
 Undisclosed commissions or other fees from mutual funds.
– See DOL Adv. Ops. 97-15A and 16A (May 22, 1997).
 “Float”
– Earnings on funds held pending investment or distribution should be
disclosed and approved. FAB 2002-3 (November 5, 2002)
 Soft Dollars
22
Enforcement Issues
What Does DOL Look For?
 DOL Statement on Mutual Fund Abuses
– review of practices of mutual funds, collective trust funds and other
pooled funds, AND their service providers and “intermediaries,” to
determine whether there have been violations of ERISA
• whether activities such as market timing or late trading
harmed retirement plan beneficiaries
• improper payments for directed investments
• whether retirement accounts were used to facilitate
market timing
23
Correction - VFCP
 The Voluntary Fiduciary Correction Program’s (VFCP) purpose is to
encourage self-correction of possible ERISA Title I violations.
 Program updated in April 2006, 71 Fed. Reg. 2026 (April 19, 2006).
 In order to be eligible for the VFCP, neither the plan or the applicant
can be under investigation, and the VFCP application must not contain
evidence of potential criminal violations.
 The VFCP covers 19 transaction types. Examples —
–
–
–
–
Delinquent participant contributions to a plan
Improper transactions with parties in interest
Benefit payments based on improper valuations of plan assets
Plan payment of excess compensation
24
Correction
VFCP Application
 An application must describe the transaction and its correction, and
provide supporting documentation, including copy of plan and other
retirement documents, proof of correction, restoration of losses,
signed checklist, and penalty of perjury statement.
– Correction procedures are specified by VFCP Program
 The application is filed with the EBSA regional office.
 PTE 2002-51 provides relief from excise taxes for some types of
transactions covered by VFCP - participant contribution violations,
certain transactions with parties in interest.

(Notice to participants required).
25
Correction
VFCP Result
 If the VFCP application is accepted, DOL issues a “no-action”
letter stating that it will not conduct a civil investigation and
that it will not assess any § 502(I) or 502(i)penalties.
 Other government agencies, or any individual, may still
enforce their rights.
 If the application indicates that a violation has not been
adequately corrected, applicants could be subject to DOL
enforcement, including § 502(I) penalties.
26
Correction
Informal Self-Correction
 Upon identifying an issue: advise DOL that entity will do its
own investigation; take steps to remedy; advise DOL on
findings; and propose correction.
 May result in DOL deferring its own investigation.
 If DOL investigates and settles, it is statutorily required to
charge a penalty in some cases (e.g., ERISA § 501(I)).
 Considerations
– May avoid DOL enforcement and penalties
– DOL may still investigate; DOL may require more
burdensome correction than anticipated
27
Correction
Form 5500 Filing

Modifications to Delinquent Filer Voluntary Compliance Program
(DFVC Program) in March 2002 further reduced penalties.
– $10/day, maximum $2000/year for large plans or $750/year for
small plans, and no more than $4000 for large plans or $1500
for small plans, even if for multiple years. 67 Fed. Reg. 15052
(March 28, 2002).

DOL/IRS announcements promise more aggressive efforts to
identify delinquent filers.
– After DOL issues a written notice of failure to file, the DFVC
Program is not available. Penalties of $50 per day may apply.
28
DOL In Court

ERISA §§ 502(a)(2) and (5) authorize Secretary to commence
certain kinds of civil actions to enforce Title I of ERISA.
– Where plan sponsor is in bankruptcy, DOL may file contingent
and unliquidated proofs of claim on behalf of plans and their
participants.

ERISA § 502(h) gives Secretary authority to intervene in private
ERISA litigation (other than benefit claim disputes). See Campbell
v. Hall-Mark Electronics Corp., 808 F.2d 775 (11th Cir. 1987)
(affirming denial of Secretary’s motion to intervene).

Secretary of Labor participates as amicus curiae in significant
cases or on significant issues (e.g., WorldCom, Enron).
29
DOL In Court
Courts have held that DOL may sue for relief, even where DOL’s
target had previously settled with class of affected plan participants.
Martin v. South Carolina National Bank 140 F.3d 1413 (11th Cir. 1998);
Secretary of Labor v. Fitzsimmons, 805 F.2d 682 (7th Cir. 1986) (en
banc).
How to address risk of ERISA “double jeopardy.”
– condition private parties' settlement on defendants' obtaining
adequate comfort that DOL will take no action
– statute of limitations
30