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Which Plans Are Targeted for Regulatory Review?

Despite the plethora of recent headlines about excessive fee lawsuits, regulatory audits, not litigation, are cited as a key risk in a recent plan sponsor survey. Large plans appear to be particularly targeted – but a certain type of plan design seems to be drawing a particularly high level of scrutiny.

In the survey of more than 300 plan sponsors by Willis Towers Watson, approximately 31% of sponsors have faced a government audit of their plans by the IRS or the DOL, and roughly half (47%) of sponsors with at least 25,000 employees have faced an audit over the same time period.

However, sponsors that manage open DB plans were almost twice as likely to be audited as those that manage only a DC plan. Just 22% of employers with only a DC plan report that they faced an audit, in contrast with 38% of those with open DB plans. Roughly a third of sponsors with closed (30%) and frozen (33%) DB plans also report being audited.

Perhaps as a result, this group of plan sponsors – which were primarily larger plans – continue to rank regulatory compliance as a “top 3” risk for today and two years from now. Fifty-eight percent of respondents have conducted a review of operational compliance for their DC plan and 56% for their DB plan in the last two years. Approximately two-thirds of respondents who selected regulatory compliance as their number 1 risk have conducted operational compliance reviews in the past two years.

Fifty-four percent of DB plan sponsors and 57% of DC plan sponsors that conducted a review in the past two years have regularly scheduled compliance reviews. Roughly a quarter (23% of DB plan sponsors and 25% of DC plan sponsors) reported that they conducted a review due to plan design changes.

The largest employers were more likely to conduct operational compliance reviews: 68% of DC plan sponsors with at least 25,000 employees and 64% of DB plan sponsors with similarly sized employee populations conducted compliance reviews.

Among those that didn’t conduct a review on operational compliance in the past two years, roughly a third of plan sponsors indicated that limited budget or resources prevented them from conducting a review. Half of DB plan sponsors and 38% of DC plan sponsors that didn’t conduct a review during this period say they have sufficient compliance processes in place, and therefore don’t require a review.

Even among organizations that selected regulatory compliance as a top 3 risk, only 33% of DC plan sponsors and 28% of DB plan sponsors say that they monitor compliance with plan documentation frequently.

DB plan sponsors are less concerned with their plan documentation compliance relative to investment-related issues. Fewer than a third (31%) monitor this aspect of their plan frequently, 35% monitor it annually, and another 30% do so on an ad hoc basis.

The survey participants comprise more than 300 retirement sponsors representing a range of industries, though most were larger plans. More than 4 out of 10 respondents had more than 10,000 participants, another 35% had more than 2,500, 14% had between 1,000 and 2,500, and just 7% had less than 1,000 participants.

For more on the survey’s findings regarding DB and DC plan sponsors’ concerns about the cost of benefits, click here.