Let's Talk About Risk, Man.

Yesterday, I saw a good post from NAPA Net regarding the potential of triggering a Form 5500 type audit.  For those unaware, NAPA is the National Association of Plan Advisors.  I found particularly interesting the list of actual 5500 responses deemed likely to trigger an audit or investigation.  Specifically listed were: 

• line items that are left blank when the instructions require an answer
• inconsistencies in the data disclosed on the Form 5500 schedules
• a large drop in the number of participants from one year to the next
• a large dollar amount in the “Other” asset line on the Schedule H

*Other red flags include hard-to-value investments, non-marketable investments, and consistent late deposits of deferrals.  Included in this category would be Self Directed Brokerage Accounts and Employer Stock.

The reason that this post struck me as interesting has to do with a topic that we discuss often on this blog and when we're out consulting with clients.  Specifically, Risk Mitigation.  Regular readers of this blog know that my firm is a Discretionary Corporate Trustee and that one of the primary reasons we are hired, although not the exclusive one, is to provide relief from exposure to fiduciary liability risk. 

 

Risk mitigation is crucial to our story, but we are consciously aware that of the fact that while fiduciary based law suits are increasing, they are still relatively uncommon in the small plan marketplace where we find most of our clients. 

One area that I've been focusing on when meeting with clients is in risk categorization.  Generally, I view employer (plan sponsor) risk falling into three main areas of concern:

a.       High Risk/Low Probability – This is the risk of law suit.  It is unlikely to occur, but if it does, it will be unpleasant, expensive financially to defend and will have a reputation cost as well.

b.      Low Risk/High Probability – We've found that in 85% of the plans we take over, we catch some kind of administrative, fiduciary or document breach up front and correct them.  These types of issues are likely to pop up from time to time and are a quite common problem.  They are relatively inexpensive to correct but do cause aggravation to clients.   

c.       Medium Risk/Medium Probability – This is the audit risk.  In my opinion, I believe that this is ought to be the biggest area of concern for an employer.  The risk of audit is becoming greater and greater and in the political environment of today, with extreme governmental debt and tax reform coming, this is one area that the government can easily generate revenues in the form of excise taxes, penalties and fines.  It is this risk that is supported by NAPA's posting.

The lesson here for employers is to make sure that 5500's are completed with the same kind of care and attention to detail that a person would use when filling out their IRS 1040.  

The lesson for advisors is two-fold. 

1.) Providing a 5500 review to help clients avoid potential audit trigger's could/should be among your services.

2.) Try coaching clients to eliminate some of those difficult to value assets like employer stock or Self Directed Accounts because those plans are the low hanging fruit from an auditor's perspective.

Finally, some a little self serving here, it would be a good idea for employers to hire a professional fiduciary services provider, like a Discretionary Corporate Trustee.