Even prior to the announced 2016 initiative, I recently heard about a situation involving a small 403(b) plan that illustrates this very well. The plan sponsor did not work with an advisor.

One of the board members had some financial background, but really just enough to be dangerous. And the organization's executive director had only a vague knowledge of some plan requirements.

Then the organization received an IRS audit notice. Fortunately, the executive director quickly turned to an advisor he knew from a local leadership group.

The advisor helped them determine that there was no plan document. In addition, the plan had not filed a Form 5500, despite the fact that it clearly could not fall within the DOL safe harbor for ERISA exemption. Compliance oversight and governance were non-existent.

The advisor guided the plan sponsor on what needed to be done to get into compliance prior to the IRS audit.

Because they were proactive and worked closely with the auditor (who saw the efforts they were making), the auditor was kind and helpful. And in the end, there were no fines or penalties associated with the audit.

As a result of the advisor's outstanding work, he was then hired to update and modernize the plan. Automatic provisions were implemented, participant education was overhauled, investments were updated and governance and compliance procedures were put into place. It turned out well for all.

The moral of this story?

If your client sponsors a 403(b) plan, have them get their ducks in a row—and fast. The auditor told this particular plan sponsor that they were flagged due to a reported pension contribution on their Form 990—yet there was no 5500 filing. Clearly, regulators are already looking.

The smartest thing the executive director did was to seek help from an advisor.

If he hadn't, the results of that audit might have been very different.

According to the most recent Profit Sharing Council of America 403(b) plan survey, over half of small 403(b) plans don't use an advisor. That means there are likely a significant number of regulatory enforcement disasters waiting to happen.

The good news, however, is that plan sponsors need not be overwhelmed by the requirements. There are many excellent advisors willing to help them. They just can't wait until the IRS comes knocking!

You can read more from Aaron on blog.principal.com

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