A Red Flag for a ‘Red Flag’ Report

  Did you hear the one about how nearly all U.S. retirement plans have “at least one regulatory or fiduciary ‘red flag’ violation”?

Well, here’s hoping you haven’t. Because this so-called “analysis” of Form 5500 filings claims to have discovered that 84% of all (that’s right ALL) retirement plans in the United States have “at least one likely Employee Retirement Income Security Act (ERISA) red flag from a regulatory and/or fiduciary violation.”

Now, having grabbed your attention, you probably won’t be surprised to find in the fine print of the press release an opportunity to “schedule a cost-free benchmarking audit.” But before you do so, you might want to take a look at the criteria this firm designates as a “red flag.”

From their press release, “Abernathy-Daley defines red flag violations as either ‘infractions, fineable offenses, fiduciary failure, or plan malpractice’ and are separated into two main categories: Regulatory Infraction Red Flags (RIRF) and Egregious Plan Mismanagement Red Flags (EPMRF).” 

As if the industry needed any more acronyms — much less made-up ones. 

With regard to the former, the press release identifies the following “selected RIRF infraction categories”: 1) loss from fraud or dishonesty; 2) not offering qualified default investment alternatives (QDIA); 3) an insufficient fidelity bond; and 4) not 404(c) compliant. With a straight face the firm claims that at least 328,833 retirement plans had at least one of these RIRFs, representing approximately 43% of the total plans. 

We’ve got no numerical breakdown by category, but someone should notify these folks that there’s no legal requirement that a plan be 404(c) compliant nor that they offer a QDIA.  These are safe harbor options available to any plan that desires them and that is willing to take on the conditions that accompany them — but it’s hardly a violation of any kind not to.

As for losses from fraud or dishonesty — well, to the extent such things are actually discoverable on the 5500, it’s likely the plan already knows the issue (and has already resolved the matter). Ditto the allegedly insufficient fidelity bond — and well, considering the categories compiled here, it would be useful to know what they deemed “insufficient.”

And then there’s the “Egregious Plan Mismanagement Red Flags” (EPMRFs). Hope you’re sitting down. Those are defined as “red flags that may not necessarily result in a fine, but represent failure of: The plan administrator in their fiduciary duty to the plan sponsors, and The plan sponsors in their fiduciary duty to their employees.”

More to the point, these “infractions” (their word choice, not mine) were detailed as “1) Not including automatic enrollment; 2) No corrective distribution of excessive contributions; 3) No 404(c) with participant-directed accounts; and 4) Failure to transmit payments on time.” Once again, we don’t have a breakdown of how many in which category, but they claim that at least 584,113 retirement plans had at least one EPMRF, representing approximately 76% of the total plans.

Once again, though — neither automatic enrollment nor 404(c) compliance is legally required (unless it’s a plan adopted after Dec. 29, 2022, and those won’t yet have shown up in the Form 5500 data). And again, if you’re able to find evidence of corrective distributions and/or failure to transmit payments on time on the Form 5500 — well, that’s only because the issue has been found, acknowledged, and likely corrected.

Look, an advisory firm can set out whatever standards it deems appropriate, affix clever (if arguably misleading) names (and acronyms) to practices that fall short of those individual standards, and even issue a press release proclaiming that it has found the vast majority of plans in existence are found “wanting” based on those standards — doubtless in hopes that it will be picked up and shared uncritically by the media (and read by potential clients).

That said, the deliberate choice to position practices that are clearly neither required nor necessary as some kind of “regulatory and/or fiduciary violation” — strikes me as a “red flag” violation of another kind.

• Nevin E. Adams, JD