However, the argument has mostly been made in discussions about new plan limit and monitoring requirements, and not much has been mentioned regarding requirements to perform plan audits and 5500 filings for plan years beginning after December 31, 2008. Bringing some insight and clarity on the issues surrounding 5500 filings and plan audits can only add support to why reducing the number of plan vendors (ideally to a single vendor) makes sense.
Note: Form 5500 reporting is applicable only to higher education employers that are 501(c)(3) organizations and governed by the Employee Retirement Income Security Act (ERISA) and not applicable to public higher education institutions as those employers are always exempt from ERISA.
A Two-Plan problem
Many higher education organizations maintain two separate plans: one plan for plan sponsor contributions (Contributory Plan), and a second plan for employee salary deferrals (Supplemental Plan). Supplemental Plans generally have multiple vendors, although due to the 403(b) regulations the number of vendors is trending downward to single digits and often a single provider. Many institutions believe that the “salary deferral only” plan would be exempt from ERISA under the 403(b) rules. The new regulations do not specifically address this issue; however, there is a possibility that the DoL will not consider the two plans as separate. In that case, all information from both the Contributory and Supplemental Plans would need to be aggregated and included in the audit and 5500 filing.
Let’s assume the employer continues these plans as separate plans, and only satisfies its reporting requirements on the Contributory Plan. During a DoL audit, the DoL may determine that the plans are really one plan, and the institution’s 5500 filing could then be considered incomplete (best case) or treated as not having been filed at all (worst case), and the DoL could levy fines against the institution.
Supplemental, Multi Vendor Plans Create Form 5500 Issues
Supplemental plans are typically invested in individual annuity or individual custodial accounts, making it difficult for institutions to "force out" assets from prior vendors. Without that asset information, it is difficult to obtain the financial information needed to complete an accurate 5500 filing across multiple vendors.
It is also difficult to track balances due to the 90-24 transfers allowed in these accounts. All participant account balances are considered plan assets, but the employer may find it very difficult to find and report on the assets when they are spread among multiple vendors and the employees have transferred assets between vendors.
Expensive, Complicated Plan Audits
The new plan audit requirement applies to all ERISA 403(b) plans with 100 or more eligible employees as of the first day of the plan year. Completing the audit obviously becomes more complicated when a plan has multiple vendors. The increased amount of work required by the auditor will result in higher audit costs. Generally speaking, the fees for performing an audit on a multi-vendor plan can run between $25,000 and $50,000 compared to single provider audit fees that range from $5,000 to $10,000.
If the increased complexity and administration requirements under the 403(b) regulations have not yet led higher education institutions to consider a single provider option, the additional burden and cost of complex 5500 filings and plan audits should be, in my opinion, the closing argument.
Michael J. DiCenso, PRP, LLIF, AIF,National Practice Leader, Gallagher Retirement Services, and President, GBS Investment Consulting
NOTE: This feature is to provide general information only, does not constitute legal advice as part of an attorney-client relationship, and cannot be used or substituted for legal or tax advice.