Running a qualified retirement plan in your business is like raising kids. Even though you think all is going well, you still have to keep your eyes open for warning signs of trouble.

In the qualified plan business, if you’re not looking for trouble, you’re not doing your job.

The IRS and the DOL encourage employers to self-police their plans and correct errors. I have never had a client uncover and fix a problem who ever paid more than a modest penalty, if any, even when the problem was a disaster. On the other hand, I have had many clients pay large penalties for small problems that were discovered by the IRS on plan audits.

We are in the middle of restating our clients’ plans under the new tax laws. Along the way we have discovered lots of problems, big and small. We’re getting them fixed, and so far nobody has paid a penalty.

The amusing part of the process, however, is the response from clients when we find a problem. If you hear yourself, or your clients, making any of the following thirteen statements, you’d better start digging deeper.

1. "My plan is too small to attract IRS attention." Wrong. Almost no qualified plan is too small to be overlooked by the IRS. As long as an IRS Form 5500 is filed for the plan, it’s on the radar screen. Some think that smaller plans are actually bigger IRS targets because the IRS knows that non-compliance is more prevalent with them. We have many plans with fewer than 100 participants audited by the IRS. Because of this, small employers should always consider SEPs and SIMPLE plans, as they are easy to run, cheap, and do not file 5500s.

2. "My plan is free." This can only be said by an employer who has no clue about his plan. Unless the plan is a SEP or a SIMPLE plan, this statement cannot be true. Every qualified plan costs something to make it go. There’s no free lunch in this business. Why do you think so many salesmen are pushing plans? There may be no separate charges for the plan or the annual administration, so the cost is buried in the investments.

3. "My _____________ (Pick one: CPA/lawyer/broker/insurance agent/whoever) takes care of everything." This is a sure sign of trouble. It tells me that the employer is relying too heavily on one person or provider. Employers should be sure that there are more than "one set of eyes" reviewing the plan. It’s not that one person cannot do the job. The problems arise when that one person doesn’t know all the information about the client’s operations.

4. "My plan’s investments are risk-free." This is impossible. All investments have risks. The risk of default is only one. There are interest rate risks, liquidity risks, inflation risks, and so on. If an employer thinks his plan is "risk-free," the employer doesn’t understand investment fundamentals and should not be allowed to manage plan assets.

5. "My plan is just fine. We’ve never had any complaints from our employees." I suppose that rationale works if we’re talking about the retirement plan for the Harvard Business School faculty. However, I would take no comfort with that statement about any other plan. The reality is that many (most?) plan participants have no idea what’s going on with the plan. A statement like this may also mean that the participants are not getting periodic financial reports, SPDs, and summary annual reports.

6. "Our plan investments always outperform the market." Gulp. What controlled substance has this guy been taking? This statement is a sign of someone who believes the jive that his plan investment advisor runs by him. Statements like this are a warning that the plan investments have no adult supervision.

7. "I am a plan trustee. So is my wife. It’s only a formality." This is dangerous, especially in an environment of declining markets. Plan fiduciaries, such as trustees, are legally responsible under ERISA for the plan investments. There is no such thing as being a trustee "in name only." True, many plans shift some investment responsibilities to participants, insurance companies, banks, and other fiduciaries. But, those measures are not full insulation from fiduciary liability. If you’re a trustee, you’re in the crosshairs.

8. "I am not a plan fiduciary. I only own the company." This should sound fine, but it’s worrisome to me. The statement addresses the problem of who is a plan fiduciary. ERISA defines "fiduciary" as anyone who handles or controls plan assets. You do not have to consent to become a fiduciary. It is easy to become an inadvertent fiduciary by your actions or your responsibilities. If you have any say in where plan assets are invested, or how they are invested, you may be a fiduciary. In small companies especially, where only a handful of people are in control, be sure that fiduciaries are properly identified.

9. "I am pretty sure I have all the plan documents somewhere." This is a classic "red flag." When the employer is "pretty sure" about the plan documents whereabouts, it probably means he has no idea where they are. Or, when they were updated. Or, who is responsible for them. In an era when plan documents have been updated time and again, there are still surprises. I recently fixed a plan that was last updated in 1973. (For you youngsters out there, that was before ERISA.) It never occurred to the employer that he had to do anything, as his insurance guy (one of his very best friends) assured him that the "insurance company home office" always took care of the paperwork. Never actually seeing that paperwork in almost thirty years never struck the employer as a problem.

10. "My plan is audited by CPAs every year. I’ve got nothing to worry about." Plans with more than 100 participants must be audited by a CPA firm each year. The CPAs are the first to tell you that these audits are not a guarantee that a plan is problem free. Audits do not cleanse every mistake. Employees may still be improperly excluded. Investments may still stink. Prohibited transactions may be lurking. Unrelated business taxable income can pop up. Non-discrimination rules may be violated. True, CPA audits frequently identify plan mistakes. But, annual CPA audits are not insurance policies.

11. "My brother-in-law has been running the plan for years." Nothing is wrong with doing business with relatives, but this is a warning sign to me. Familiarity breeds complacency. Small problems may be glossed over to keep peace in the family. Can’t let my brother-in-law think I don’t trust him, can I? Some of the worst plan disasters I’ve seen had a brother-in-law (or a son-on-law) in the mix.

12. "What’s a 5500?" Enough said.

13. "My family has a lot of businesses." This tells me to start looking for controlled groups and affiliated service groups. Those are the rules that force the aggregation of retirement plans for business entities that have a few common or related owners. Failure to comply with these rules results in automatic plan disqualification.

How to contact Gene Parrs