The Department of Labor’s Employee Benefit Security Administration — the division that regulates and enforces policies that protect employee retirement plans — is recovering more from missing employee contributions to retirement plans despite conducting fewer audits last year.

EBSA recovered more than $1.1 billion in missing employee contributions in the latest government fiscal year, which ended Sept. 30, 2017, compared to $777.5 million in total recoveries in fiscal year 2016.

EBSA slightly reduced the number of cases it closed in fiscal year 2017 compared to the year before. In fiscal 2017, it closed 1,707 cases with 1,114 civil cases closed “with results” or monies recovered, 134 civil investigations referred for litigation, and 50 civil cases where litigation filed. In fiscal 2016, EBSA closed 2,002 civil investigations with 1,356 of those cases (67.7%) In 2017, fewer cases — 65.3% — closed with monetary results for plans. In DOL-provided figures for the past five years, EBSA reached a peak of 3,928 civil cases closed in 2014.

EBSA has been able to achieve these higher fines with fewer audits mainly due to two factors, according to EBSA experts and attorneys who represent retirement plan sponsors. One is an increase in the amount for fines. The other is EBSA’s use of data algorithms that can scour Form 5500s, the benefit documentation that employers must provide to the government, and other sources (such as filings for bankruptcy, news reports of companies going out of business and complaints from plan participants) to find discrepancies that raise red flags for an audit, according to EBSA.

[Image credit: Bloomberg]
[Image credit: Bloomberg]

EBSA conducts ERISA audits of employee retirement plans for a variety of reasons. The team of auditors and investigators look for missing funds, ensure that a recently closed business is still offering retirement benefits to former employees, that employers have made every “reasonable” effort to find employees that have moved or changed their names so that they can receive their retirement funds, or to inspect the status of current retire plans. The investigation can focus on the employer, the plan administrator, and in some cases both parties depending on the scope of the inquiry.

“We are trying to get the money back to the employees,” says a Department of Labor spokesperson.

Of the 2017 $1.1 billion recovery figure, $682.3 million was recovered from enforcement actions, $418.7 million came from what DOL calls “informal complaint resolution,” $27.9 million were part of EBSA’s Abandoned Plan Program, and $10 million from EBSA’s Voluntary Fiduciary Correction Program, which allows employers to avoid ERISA penalties if they comply with regulators.

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The DOL fines have also increased. Starting Aug. 1, 2016, the penalty for a business that fails to furnish statement of benefits to former plan participants rose from $11 per employee to $28 per employee. Failure or refusal to file an annual Form 5500 benefit report climbed from $1,100 per day to $2,063 per day.

Along with the 14 other upgraded DOL fines, the largest penalty is for employers that prohibited payment from DB plan during the period when the plan has a liquidity shortfall. It rose from $10,000 per prohibited payment to $15,909.

Triggering an audit

The EBSA division employs two teams to look into potential ERISA violations: so-called “benefit advisers” that look into possible irregularities and investigators who conduct the actual investigation into suspected malfeasance. (These “benefit advisers” is an in-house term used by EBSA and they are not to be confused with the benefit advisers who sell and establish insurance plans for employers).

The size of the company offering the retirement plan does not matter. According to ERISA experts, an audit can be random or targeted, and can cover Fortune 100 companies to small businesses with as few as two employees. If a company has a retirement plan and a healthcare plan with benefits, that company is a candidate for review of its books by the U.S. government.

However, according to a regional EBSA director who works on ERISA audits in the Northeast, the number of audits is actually diminishing. “We are opening fewer cases and trying [them]. What we discovered over the years is we need to be smarter in how we investigate cases and make sure what we are doing is impactful,” says an EBSA regional office director. For this story, the DOL asked that he not be named.

A DOL spokesman says the agency is focused on recovering funds for the plan, not on fining the plan, per se. “The desired outcome is never a civil suit, unless it is absolutely necessary. If we can get something corrected informally it is to everyone's benefit. If there is an obvious crime, then yes, of course,” says a DOL spokesman.

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That said, the DOL is emboldened to cast a wider investigatory net thanks to access to data from Form 5500s and now that it is auditing plan administrators as well. According to Thomas E. Clark Jr., an ERISA attorney for the Boston-based Wagner Law Group, EBSA investigators no longer have to search plan by plan; by investigating plan sponsors they can see the documents on hundreds of employer retirement plans at a time.

“They have algorithms and software that sifts through the data and looks for bell curves, really crazy statistician stuff, and they are already crunching numbers with the 5500s,” says Clark. He adds that if the numbers do not add up — such as an interruption in employer contributions to a retirement fund — that employer will be audited.

The DOL declined to discuss in detail its algorithms and other software.

Clark adds sometimes an error is so obvious that the DOL doesn’t even need an algorithm to spot a “red flag.” If an employer has been late two years when it comes to contributing to a retirement plan, for example, they can pretty much guarantee an audit because they are doing something wrong, he says. “Today I can send you $10,000 with my iPhone if I had to. There is no reason you can’t get payroll money to the 401(k) provider these days. It’s a click of a button in an internet browser.”

These DOL innovations as well as updating reporting requirements for service provider fees and expense information is a clue of the direction the DOL is taking.

“I see this all as just part of one big arc of the DOL redefining itself for the new century and redefining their mission and figuring how they can help the constituents that they are asked to support,” Clark says. “Not just enforce the law, but they truly believe that they’re helping the people in the ERISA plans that they regulate.”