The Office of the Inspector General (OIG) is concerned about the ability of the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) to exercise oversight and protect the integrity of benefit plans, particularly concerning audits. The OIG for the U.S. Department of Labor expressed that sentiment in its most recent semiannual report to Congress.
The report summarizes the OIG’s assessment of the activities of the DOL for the period April 1, 2023–Sept. 30, 2023. It follows up on the OIG’s earlier work and updates how changes in accounting standards and EBSA actions have affected EBSA’s oversight of benefit plan assets ERISA covers.
The OIG remains concerned about EBSA’s ability to protect the integrity of pension, health, and other benefit plans of approximately 153 million workers, retirees, and their families. In particular, the OIG is concerned about the statutory limitations on EBSA’s oversight authority and the inadequacy of the resources on which EBSA can draw in order to conduct compliance and enforcement activities.
Inspector General Larry D. Turner in his remarks at the start of the report says that in exercising its oversight, the OIG seeks “to improve DOL programs relied upon by millions of Americans.” Kelsey Mayo, American Retirement Association Director of Regulatory Affairs and Lead Employee Benefits Attorney at Poyner Spruill LLP remarked to NAPA, “Sufficient oversight and enforcement programs is essential to a healthy, working private retirement system.”
Limited-Scope Audits
The OIG report says that “ERISA provisions allow billions of dollars in pension assets to escape full audit scrutiny” and characterizes that law as “a decades-long challenge to EBSA’s compliance program.” ERISA, it notes, generally requires every employee benefit plan with more than 100 participants to obtain an audit of the plan’s financial statements each year.
The OIG points out that there is an exemption in ERISA that allowed auditors to perform limited-scope audits. In 2019, the OIG continues, the American Institute of Certified Public Accountants updated its accounting standards related to limited-scope audits. These standards, it says, replaced limited-scope audits with audits under ERISA Section 103(a)(3)(C) and imposed new performance requirements on plan management and auditors.
“ERISA’s independent qualified plan audit serves an important function in ensuring retirement plans are operated in compliance with their terms and applicable law. However, those audits come at a sometimes significant cost to the plan. The limited-scope audit exception is an important feature of the law to ensure that the cost of the audit does not outweigh the benefits,” said Mayo.
The OIG expressed some concerns with limited-scope audits. Those audits, it says, excluded pension plan assets certain banks or insurance carriers had already certified; and “provided little to no confirmation regarding the actual existence or value of the assets.”
That’s not a new position for the OIG, which notes that 10 years earlier it had reported that limited-scope audits “provided weak assurance to participants regarding the financial health of their plans” in 2013 and 2014, when $3 billion—including an estimated $800 million in hard-to-value alternative investments held in regulated entities such as banks.
Challenges in Meeting Its Duties
EBSA, the OIG says, has “limited available resources” and faces challenges in exercising its oversight of private-sector benefit plans.
Not only that, but the report also suggests that EBSA faces a similar situation regarding federal retirement plans. It contends that EBSA lacks the authority under the Federal Employees’ Retirement System Act to effectively oversee hundreds of billions in federal employee Thrift Savings Plan assets. Yet that law requires EBSA to conduct regular compliance audits to determine whether the Federal Retirement Thrift Investment Board is fulfilling its fiduciary duties and properly safeguarding the assets of Thrift Savings Plan participants’ assets.
Be Deliberate
Ilene H. Ferenczy, managing partner of Ferenczy + Paul LLP, indicates that the DOL may want to consider a deliberate approach. “Everyone agrees that employee benefit plans represent a huge repository of assets that can be too easily subject to mishandling or misappropriation by actors with bad intent,” she told NAPA. But she continued, “this category does not represent the vast majority of employers and practitioners that seek to provide bona fide benefits to employees, either out of a desire to see them economically thrive throughout and after their working lifetime or to offer an employment package designed to recruit the best talent.”
The DOL’s attention and resources could be better directed, Ferenczy suggests. “Many of the DOL’s actions are focused on the inadvertent errors caused by overly complex procedures and regulations,” she remarked. Similarly, Mayo suggested that EBSA “should evaluate the use of resources in its investigations and balance the resources expended with the potential violations it is discovering.”
“I believe EBSA investigations serve a very valuable purpose,” said Mayo, but given its limited resources and the significant cost to plan sponsors, EBSA could “adopt a more targeted investigation strategy that would limit the burden on plan sponsors and fiduciaries while continuing to protect participants against the most harmful violations of ERISA.”
Coming Up
The OIG says that EBSA needs to focus its resources on investigations that are most likely to result in the prevention, detection, and correction of violations of ERISA. It argues that this “is particularly important given the number of benefit plans EBSA oversees relative to the number of investigators it employs.”
The DOL should better focus its enforcement activity, Ferenczy suggests, remarking, “It would behoove the DOL to use its limited resources to concentrate more on developing practical rules that can be reasonably administered by plan sponsors and their service providers, as well as enforcement in relation to the activities that truly threaten participants’ benefit security.”
The OIG says that in fiscal year 2024, it plans to follow up on the earlier work it had done overseeing limited-scope audits.
“We support clear and accurate disclosures related to plan assets,” said Mayo. “However,” she added, “any additional procedures that OIG recommends following the outcome of its study should continue to follow ERISA’s general framework of balancing costs to the plan against the potential protections for participants.”
