The middle of April is fast approaching and everyone knows what that means – time to get those 2011 income tax returns filled out and filed.
What few people realize is that they also have until Monday, April 16, to open a new individual retirement account (IRA) for 2011 or make your annual contribution to an existing one.
With the limit for contributions this year set at $5,000 – or $6,000 for those over age 50 – putting cash in a regular or Roth IRA can shave a big chunk off your personal tax bill.
In addition, this year you may also be eligible for a special "Savers Credit" of up to $1,000 for contributions to either an IRA or an employer-sponsored retirement plan.
I like getting added deductions or credits for putting my money in my retirement plan, if only because I'm a big fan of giving the government the least amount of cash I can legally get away with.
I can't, however, say whether such contributions are right for you – your accountant or tax adviser will have to help you with that decision.
What I can say is this…
If you do put money in a pension plan, whether self-directed through a custodial agent or via an employer-sponsored plan, make sure you know exactly where your money is going – and who's really managing it
once it gets there.
The Pension Plan Auditing Gap
That's obvious, you may say – but recent studies have found very few people are fully aware of the inner workings of their pension plans.
And, despite federal laws to the contrary, the information isn't even readily available in many cases.
Since 1999, U.S. Department of Labor regulations have required that pension plans be audited annually by an independent certified public accounting (CPA) firm.
That rule seems fairly clear cut, which is probably why most investors feel confident that the assets in their pension funds are secure.
However, there are a substantial number of exclusions to and waivers from that rule – so many, in fact, that federal regulators recently estimated up to 70% of America's pensions have never been audited.
This gap in regulatory coverage even prompted the Department of Labor's own Inspector General to warn in his annual report to Congress late last year that "pensions lacking full audits provide no substantive assurance of asset integrity to plan participants."
In other words, the financial assets your pension plan claims to hold may not be properly valued – or, in extreme cases, may not be there at all.
And that could spell potential disaster when it comes time for you and your fellow plan participants to
start collecting benefits.
How is this failure of regulatory oversight possible?
For starters, Labor Department rules specifically exclude small pension plans – those with fewer than 80 participants - from the audit requirements.
Only "Large Plan" pensions – those with more than 100 participants at the start of the plan's fiscal year – have to be audited annually by an independent certified public accounting (CPA) firm.
If the plan has less than 100 participants at the start of the year, no audit is required until the number of plan participants exceeds 120.
In addition, federal, state and local government plans, as well as those of many religious organizations, are exempt from the federal pension laws, as laid out in the Employee Retirement Income Security Act (ERISA) of 1974. (Note: Provisions of this law, since amended several times, have long been considered onerous by both pension administrators and corporate financial officers, who famously redefined the ERISA acronym as standing for "Every Ridiculous Idea Since Adam.")
Finally, pension plan administrators can file for a waiver of the audit requirements for a number of other reasons, which many of them do simply because of the potential cost.
An independent audit of a plan with just 100 participants can cost from $6,500 to more than $10,000 per year, while the fees for auditing a plan with 1,500 or more participants can easily run in excess of $25,000.
Instead of ordering a full CPA review of their plans, pension administrators can also request a so-called "limited-scope" or "no-opinion" audit, in which examiners don't have to verify information prepared and certified by a bank, brokerage firm or similar financial institution.
In many cases, this means auditors are excluded from reviewing virtually all of a plan's assets – a process the Labor Department's Inspector General described as "worthless."
Ensuring the Safety of Your Pension Plan Assets
So, how can you find out if your specific pension plan has been audited, ensuring the accuracy of reports as to the type and value of its assets – and what can you do if it hasn't?
The first step is simply to review all the information you receive regarding your pension – either from your employer or the plan administrator – starting with the Summary Plan Description.
This document explains how your plan is structured and how it's supposed to work, and will often contain a section on audit procedures.
You can also request a copy of the plan's Form 5500 annual financial report (though you may have to pay a copying fee for reports over 100 pages), or review it online at the Labor Department's e-filing site, www.efast.dol.gov.
Be aware, however, that administrators have seven months from the end of the plan year to file their annual reports, so the information may be outdated by the time it's available.
Next review all the benefit statements and other plan information you receive.
If you are in what is known as a "defined contribution plan," which includes most Individual Retirement Accounts (IRAs) and 401(k) plans, you should receive quarterly statements or annual statements, depending on whether you take an active role in choosing investments for your account.
If you are in a "defined benefit plan," which provides retirement benefits based on contributions by your employer, you may only receive a statement every three years, but you should receive an annual notice regarding the plan's "funding status" – i.e., the value of the plan's assets relative to its future payout obligations.
With either type of plan, you should look for an audit report or statement from the plan's accountants, as well as reviewing all the information related to your personal account to ensure it is accurate.
If you find mistakes, contact your employer's Human Resources department or the pension plan administrator to request explanations or corrections. (Note: The correction process may take a while as the requests usually must be in writing and will require documentation.)
If you don't find an audit report, you'll have to ask the plan administrator if one has been performed and, if it has, request the results.
If the plan hasn't been audited, ask for an explanation of why not.
Unfortunately, plan participants can't demand an audit. However, if your plan is covered by ERISA, you can file a complaint with the Labor Department's Employee Benefits Security Administration (EBSA), which is responsible for overseeing the conduct of pension plan fiduciaries, the investment of plan assets, the reporting and disclosure of plan information and the rights of plan participants.
If a pattern of mistakes or repeated misconduct is recognized, EBSA may order an audit. Such a general plan audit would include:
- Review of individual participant information for eligibility and accuracy of employment data.
- Review of the assets held in the plan and the net change in values over the prior year.
- A check of investment goals and performance to ensure the assets in the plan will be able to finance the future cash outflow in the form of participant benefits.
- A risk assessment to verify the soundness of the investment choices being made by plan financial managers.
- An evaluation of all other internal and external factors relative to the overall financial health of the company or organization whose employees the plan covers.
You can feel free to make your requests for account corrections or a plan review because ERISA rules prohibit employers from firing or disciplining employees as a reprisal for making a complaint.
If your concerns are not resolved or mistakes corrected, federal law also gives you the right to sue the pension plan or its fiduciary agents to appeal a denied claim, recover unpaid benefits, obtain plan or audit documents previously requested in writing but not received, or stop any other act or practice violating ERISA rules or the terms of the individual plan.
If problems with your pension plan are not resolved or other events occur resulting in its failure or its financial inability to pay the promised benefits, your final option is to seek relief from the Pension Benefit Guaranty Corporation (PBGC), a federal program that guarantees most defined benefit plans. Contact information is:
Pension Benefit Guaranty Corporation
1200 K Street, NW
Washington, DC 20005-4026
Telephone: 202-326-4000 or 1-800-400-7242 toll free
So, don't fail to include a check on your pension plan before you add your 2011 contribution to it.
You've worked hard your entire life in anticipation of a financially secure retirement, and a little effort now can ensure the benefits you're expecting will be there when the time finally comes.
News and Related Story Links:
- U.S. Department of Labor:
- U.S. Department of Labor:
- Pension Benefit Guaranty Corporation (PBGC):