View Media - Greenberg Traurig LLP

HUMAN CAPITAL MANAGEMENT 

TODAY’S PENSION PLAN ENVIRONMENT IS A GREAT SOURCE OF CONCERN TO MANAGEMENT, WORKERS AND 

REGULATORS ALIKE, BUT BY EXAMINING BEST PRACTICE GLOBALLY AND KEEPING ABREAST OF LEGAL DEVELOPMENTS, WE 

CAN AVOID DISASTERS, WRITES JEFFREY D MAMORSKY, SENIOR PARTNER AT 

GREENBERG TRAURIG, LLP IN NEW YORK. 

The pensions 

minefield 

M 

DANGER 

CEO009_035_Greenberg.indd 56 24/8/06 16:46:56


Draconian 

penalties are in 

place for those 

who fall foul 

of SOX 404 

requirements. 

there has been a cultural change of monumental proportions with regard 

to pensions all over the world. At the core of this sea change has been 

the regulatory imposition of heightened fiduciary responsibilities of 

employers and trustees in both US and non-US pension jurisdictions and the 

recognition of the importance of comprehensive and effective fiduciary control 

procedures for plans. 

These heightened responsibilities have been particularly noticeable in 

the US and UK, and may be a harbinger of things to come in other pension 

jurisdictions, which may similarly conclude that the private sector (trustees 

and employer plan sponsors) needs to self-police the pension 

system in order for it to survive. 

High-profile scandals 

Recently we have been confronted with transparency issues 

such as hidden and bundled service provider expenses and 

self-dealing conflicts of interest that sometimes exist with plan 

vendors. This occurred in the US, despite the fact that federal 

pension law – the 1974 Employee Retirement Income Security 

Act (ERISA) – contains rules that require plan sponsors to 

establish internal control procedures to monitor compliance 

with their fiduciary responsibilities. 

These rules were in some cases not followed since there were few real teeth 

in the law. It took SOX, with its draconian certification penalties and ERISA 

‘white collar’ criminal penalty provisions, to make plan sponsors take pension 

governance more seriously. The same thing has happened in the UK with new 

pension legislation and the introduction of a Pension Regulator and the EU 

Directive on Pension Governance. 

US requirements 

Companies sometimes overlook the fact that the SOX Section 404 

(Management Assessment of the Adequacy of Internal Control Procedures) 

requirement applies to pension and benefit expenses. This is an issue that 

cannot be overlooked since draconian penalties are in place for those who fall 

foul of this provision (see box below). 

SOX also applies to private companies since it adds new ERISA White Collar 

Criminal Penalty Provisions, which impose sanctions and up to ten years’ 

imprisonment on employer plan sponsors and plan fiduciaries for wilful violations 

of ERISA’s financial statement and other reporting and disclosure requirements. 

This could occur in the case of a certified financial statement of a pension, 401(k) 

or other retirement plan where the auditor now requires employer plan sponsors 

to represent that the plan is operated pursuant to its terms and applicable law. This 

representation, which appears as a footnote in every plan’s financial statement, is 

likely to be inaccurate in the absence of internal control procedures that enable the 

employer plan sponsor to identify inconsistencies between administration, plan 

provisions and IRS qualification requirements. 

➤ 

DOING THE TIME 

SOX 404 contains extremely harsh sanctions of $2m in 

fines and up to ten years’ imprisonment for non-wilful 

certification of any statement that does not comply with 

SOX requirements. Should you be stupid enough to wilfully 

lie to regulators, you could face fines of $5m/up to 20 

years’ imprisonment. 

CEO • Subscribe for free at www.the-chiefexecutive.com 57 



The importance of this issue has recently been addressed by 

the AICPA with the issuing of SAS No. 99: ‘Consideration of 

Fraud in a Financial Statement Audit’, which concludes that 

the lack of internal control procedures for establishing and 

monitoring an employer’s financial statement representations 

may result in a material misrepresentation and possibly fraud. 

In this regard, the AICPA recommends the engagement of a 

specialist to perform an independent review to ascertain the 

adequacy of internal 

control procedures. 

IRS stipulations 

Under the IRS 

Employee Plans Closing 

Agreement Program, 

the IRS may impose 

monetary sanctions on 

employers for failure to 

operate retirement plans 

in accordance with IRS 

qualification requirements and for failure to follow the terms of 

the plan documents, even if plan operation is in compliance with 

IRS qualification requirements. The IRS EPCRS Program requires 

employers to establish self-audit internal control procedures 

to qualify for self-correction and mitigate the amount of IRS 

monetary sanctions. 

Sanctions may be imposed by the IRS on audit, even if failures 

are unintentional discrepancies between plan operation and plan 

documents and result in no harm to plan participants. The level of 

sanctions can be draconian since the maximum payment amount 

is the total amount of tax that would apply if the plan were 

disqualified. For example, the starting point for negotiations with 

the IRS on the amount of the sanction is often 20 per cent 

of plan assets. 

58 

Sanctions may 

be imposed by 

the IRS, even 

if failures are 

unintentional 

discrepancies. 

M 

ANGER 

There is also 

a new IRS audit 

initiative targeting 

‘large’ retirement 

plans with 

JEFFREY D MAMORSKY 

2,500 or more 

Jeffrey D Mamorsky is senior partner at participants. This 

Greenberg Traurig, LLP and shareholder large retirement 

chairman of the Employee Benefits plan audit typically 

Group. He concentrates his practice lasts for 200–300 

in compensation and employee 

staff days and is 

benefits law. He serves as employee 

benefits counsel to large multinational conducted by six to 

corporations, closely held businesses, eight professionals 

prominent not-for-profit organisations, (including an IRS 

governmental agencies, Big Five revenue agent, 

accounting firms, leading employee 

benefits and 

benefits consulting firms and major 

multi-employer pension and welfare computer audit 

funds. His publications have been specialists, a benefits 

cited on numerous occasions by the attorney and an 

US Supreme Court and other federal actuary). Finally, 

and state courts. In addition, he 

under the new IRS 

lectures widely on ERISA and employee 

benefits and was one of the drafters Employee Plan’s 

of the ERISA law and subsequent focused audit 

governmental regulations. 

programme, the IRS 

www.gtlaw.com 

has modified its 

auditing procedures 

to focus on whether 

the employer, trustees 

or plan administrator have established internal controls to ensure 

that the plan is operationally compliant with the plan document 

and Code requirements. If the IRS auditor is satisfied that such 

internal controls are in place, the plan examination may be limited 

and/or curtailed. 

UK regulator established 

There has also been a growing interest in pension governance 

in the UK. The Pensions Act of 2004 focuses on the 

future governance and administration of pension schemes 

and includes provisions for a new Pensions Regulator to 

concentrate its efforts on schemes that possess a high risk 

of fraud, bad governance or poor administration. In 

this regard, the Act provides that the Pensions 

Regulator may issue codes of practice 

‘containing practical guidance in 

relation to the exercise of functions 

under the pensions legislation, and 

regarding the standards of conduct 

and practice expected from those who 

exercise such functions.’ 

The Pensions Regulator issued a Code of 

Practice on Internal Controls in September 2005. The 

Code of Practice is a must-read, not only for UK pension 

trustees, sponsoring employers and plan administrators, 

but also for anyone interested in pension scheme control 

and governance. 

CEO • Subscribe for free at www.the-chiefexecutive.com 


8 

The following important points contained in the Code of 

Practice are illustrative of what needs to be done to monitor 

fiduciary governance and controls: 

• Trustees or managers of an occupational pension scheme must 

establish and operate internal controls that are adequate for the 

scheme to be administered and managed in accordance with the 

scheme rules and in accordance with pensions legislation and 

any other relevant legislation. 

• Trustees or managers should develop a risk management 

framework when assessing the existence or adequacy of key 

internal controls. 

• Trustees or managers are expected to set up adequate internal 

controls that enable them to react to significant funding, 

operational, financial, regulatory and compliance risk. 

• Not only will the establishment of adequate internal controls 

ensure the effective and efficient running of a scheme, they will 

also play a key role in reducing the likelihood of fraud. (This 

incorporates concepts contained in SOX and SAS 99 issued by 

the AICPA.) 

• Persistent failure to put in place adequate internal controls may 

be a contributory cause of an administrative breach or, in more 

extreme cases, result in the reduction or loss of scheme assets. 

Where in doubt over the effective stewardship of a scheme, the 

Pensions Regulator expects to receive a whistle-blowing report. 

This Code should primarily be read and acted upon by 

trustees, both individual and corporate, and managers of 

occupational pension schemes. The Pensions Regulator also 

recommends the Code to a wider readership, including scheme 

advisers (in particular scheme auditors because of their 

involvement in the assessment of key financial controls during 

the audit cycle), participating employers, service providers 

– such as fund managers, custodians and administrators – and 

others involved with the management and administration of 

occupational pension schemes. 

What can be done? 

Employers, trustees and other responsible fiduciaries must 

recognise that they have individual accountability for decisions 

affecting the financial and operational conduct of the plan 

and scheme. In this regard, it is important to seek the advice 

of independent counsel who can render a clear and unfettered 

analysis and examination of critical fiduciary governance and 

operational issues, the private and privileged correction of 

operational shortcomings, and assist with the installation of special 

protective insurance coverage to protect against large personal 

liabilities. Put another way, employers, trustees and their counsel 

need to self-police the pension system in order for it to survive. • 

How safe is your pension scheme? 

For the latest pensions initiatives and legal developments 

visit www.the-chiefexecutive.com 

CEO • Subscribe for free at www.the-chiefexecutive.com CEO009_028 Advert.indd 4 14/6/06 59 15:53:36

View Media - Greenberg Traurig LLP

Create successful ePaper yourself

Delete template?

Save as template?