Government officials now expect 401(k) plan sponsors to conduct periodic due diligence reviews. With respect to their 401(k) or other retirement plans, the problem is that most sponsors (owners) do not have the in-house resources to do so.This is not something that 401(k) plans historically did. On the heels of the recent mutual fund scandals, though, Labor Department officials indicated that sponsors had a duty to periodically investigate plans and benchmark funds and fees.

Baby Boomers are now retiring, and their 401(k) accounts often are their primary source of retirement income. A sponsor potentially could be liable for less-than-stellar 401(k) account growth if employees can claim that he did not meet his fiduciary duties.

Trusting the reputation of a major mutual fund company is not enough anymore. Sponsors must investigate and compare their plans to other programs at least every two to five years, as well as demonstrate that their plan expenses are in line with what others are paying. Blind trust is not prudent. Sponsors need a process, and need to document that process.

Every fiduciary decision has to be made through a careful process. According to ERISA, the primary plan fiduciary is the sponsor, i.e., the employer. Therefore, it is the employer's responsibility to ensure the prudent selection and oversight of plan vendors.

Sponsors must monitor vendors in two ways: micro-monitoring, which should occur annually, examines plan features and services, while macro-monitoring every three years or so allows sponsors to benchmark with competitors.


Smaller employers who lack comparative resources and manpower find it difficult to monitor vendors to this extent. Thus, owing to ERISA provisions that compel bewildered sponsors to take on experts to help with due diligence, most small to midsized plans will need to hire consultants.

There is potential liability if due diligence reviews are not conducted. Failure to engage in a prudent process may breach fiduciary duties, which may render the sponsor liable for damages. For example, if plan participants pay fees that are higher than the current market because the sponsor did not perform a review, that fiduciary could be liable for the higher fees.

But as long as the sponsor can prove that they did a proper investigation, they can potentially shield themselves. The employer has to show that they engaged in a prudent process and that they made a reasonable decision based on that process.

This applies to all retirement plans, not only 401(k)s.

However, as the economy begins to falter, the risk of being audited becomes increasingly greater. The Internal Revenue Service looks for some things on tax returns that make an audit of a return more likely.

This includes putting too many zeros on a tax return. For example, a client is better off deducting $797 for charitable contributions than taking $800. The IRS is looking to find people who guess, estimate or make up numbers. An $800 deduction looks like an estimate or worse. A $797 deduction looks like they figured out the true amount of the deduction. When the IRS audits a taxpayer, they are looking to get money. Exact numbers on a return would not ordinarily end with a few zeroes. For business owners, good ways to get audited include taking a low salary, having a retirement plan that has not been updated to reflect new laws, and having independent contractors, illegals, etc., as employees.

Under new tax laws, accountants will be forced to report clients to the IRS under certain circumstances. There is a new $100,000 fine for accountants who do not report directly to the IRS on clients if they deduct certain things. Clients can still put what are called listed transactions as deductions on their tax return, but their accountant has to write, on their own, directly to the IRS and tell them about any listed transactions that are on the return. Listed transactions can include certain types of retirement and insurance plans, etc. The IRS has recently made the accountant a tax policeman.

But, in these perilous times, there are a few creative ways to reduce insurance or tax costs. Utilizing techniques such as health savings accounts to reduce insurance costs and taxes, VEBAs to lower taxes, deducting succession and estate planning costs, insurance swapout processes to limit insurance costs, and 412(e)s to obtain large tax deductions or life settlements to get paid for life insurance without dying will be helpful when looking to save money.

Clients can tell how good their accountant is by asking how many of the above techniques they use to reduce the client's taxes. Applying some of these techniques to their everyday life will allow them to substantially reduce their taxes, more efficiently save for retirement, reduce health insurance and life insurance costs, and change the way they spend money.

In conclusion, the best way to stay afloat in this hectic economy is to be mindful of what the future entails. Planning ahead and being cautious are two ways to audit-proof a tax return, and in terms of 401(k) retirement plans, picking the proper retirement fund will benefit your clients as the years pass.

Clients want investments that don't lose a lot of money and to deal with financial institutions that will still be in business in the future.

Lance Wallach, CLU, ChFC, speaks and writes extensively about VEBAs, retirement plans and tax-reduction strategies. Reach him at (516) 938-5007 or 935-7346.

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