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Risks Associated with Alternate Retirement Benefit Plans
Those who have defined-contribution plans are generally comfortable with them and understand how they work. But what about some of the other options, such as 403(b) or employee stock ownership plans? Here, PICPA's Bill Hayes speaks with Joanne Szupka, CPA, about her Employee Benefit Plans Conference discussion on the risks associated with other types of plans.
By William J. Hayes, managing editor, Pennsylvania CPA Journal
Most employers, many employees, and all financial advisers know that 401(k) plans offer tax-advantaged retirement savings. Employers and employees who have these defined-contribution plans are comfortable with them and understand how they work. But what about some of the different options, such as 403(b), defined-benefit, or employee stock ownership plans? Before diving into one of these pools, you need to know the risks and trouble spots. At the May 19, 2020, PICPA Employee Benefit Plans Conference, available exclusively via webcast, PICPA member Joanne Szupka, CPA, assurance director and northeast region practice leader with BDO USA LLP, will discuss the risks associated with other types of plans, the differences between 401(k) and 403(b) plans, and more. In this interview, you will get a preview of her session.
What are one or two of the risks associated with non-401(k) employee retirement plans, such as 403(b)s or defined-benefit plans?
To start, a 403(b) plan may have more than one service provider – custodian and trustee. Combining the activity for a 403(b) plan can be challenging, and we are starting to see 403(b) plans changing service providers. This can impact an audit in various ways from the opinion – especially if there is an additional disclaimer in the opinion – and testing if active contributions are being stopped to one of the service providers.
With defined-benefit pension plans, there can be difficulty with actuarial valuation under ASC 960 and the review of the actuarial assumptions within the valuation, especially the mortality tables.
Do 403(b) plans have any similarities with 401(k) plans that make them as attractive an option?
Attraction isn’t the primary difference, as 403(b) plans are only available to not-for-profit organizations. When compared to 401(k) plans, 403(b)s have similar, yet different, plan provisions, such as universal availability and additional catch-up contribution requirements. Also, 403(b) plans are not subject to annual ADP testing.
One risk with frozen defined-benefit plans is record retention for the original benefit calculations; many of these plans have been frozen for over 15 years. Plan sponsor record-retention policies may differ from what is detailed in the Employee Retirement Income Security Act (ERISA) of 1974.
Can you give us some insight on the Department of Labor’s recent findings on employee stock ownership plan (ESOP) investigations and what they mean for employee benefit plans?
The Department of Labor released data on their investigations of ESOPs covering 10 years from 2007 to 2017. Of the ESOPs investigated, 60% had a violation. The leading issue identified in the investigation was stock valuation. Auditors of ESOPs need to properly assess the valuation and the assumptions within the valuation.
Check out Joanne Szupka’s session on 401(k) plans and alternatives on the May 19 PICPA Employee Benefit Plans Conference webcast.
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