March 27, 1998
 
 

MEMORANDUM FOR:             OLENA BERG
                                                      Assistant Secretary
                                                         for Pension and Welfare Benefits
 
 
                                                            / s /
FROM:                                         JOHN J. GETEK
                                                      Assistant Inspector General
                                                         for Audit

SUBJECT:                                 PWBA's Enforcement Strategy:
                                                      Results Need to be Analyzed
                                                      to Increase Return on Investment
                                                      Final Report No. 09-98-002-12-121

Attached is our final report on the Pension and Welfare Benefits Administration's (PWBA) Enforcement Strategy.

Overall, we concluded that PWBA's enforcement strategy is appropriate and has disclosed significant Employee Retirement Income Security Act (ERISA) violations and large monetary results. PWBA's recent refinements to its enforcement strategy coupled with additional investigative staff, have increased monetary results from $231 million in fiscal year (FY) 1995 to $465 million during the first three quarters of FY 1997.

We did find, however, that PWBA's enforcement program does not fully utilize targeting techniques' results to direct resources to plans with greater potential for ERISA violations. This lack of responsiveness is due primarily to: (1) incomplete analysis of program results achieved from resource investments; (2) program goals that are not based on program results linked to resource investments; and (3) Internal Revenue Service (IRS) temporary refusal of access to Centers. As a result, PWBA commits disproportionately high resource expenditures to cases less likely to have ERISA violations and low resource expenditures to cases with greater potential for ERISA violations. PWBA could improve enforcement efforts by reallocating investigative resources to the more effective proactive case selection techniques.

We recommend the Assistant Secretary for Pension and Welfare Benefits strengthen the agency enforcement program by:
 
 

B)     using this analysis to deploy investigative resources to those proactive targeting methods which demonstrate the highest return on investment; and

C)    working with IRS to resolve the denial of access to the Annual Reports Form 5500 at their Centers.

In response to the draft report, PWBA agreed that formal evaluations of the enforcement program may assist in deciding how to use enforcement resources. PWBA noted that, since 1990, the agency has regularly reviewed progress on its national and regional enforcement initiatives. PWBA has, in the past, conducted detailed studies of the sources of cases and analyzed the results according to those sources. However, PWBA acknowledged there has been a lapse in doing these studies because the Office of Policy and Research (which did the analysis) has been too busy with health care-related issues. PWBA stated that increased analysis would be part of a proposed reorganization.

Based on PWBA's response, we have resolved and closed Recommendations B and C. We are concerned that PWBA tied implementation of Recommendation A to a possible reorganization. We believe the recommendation should be implemented regardless of the reorganization. Therefore, Recommendation A will remain open until specific action is determined.

We would appreciate receiving your written response within 60 days. If you have any questions regarding this report, please contact Warren A. Seitz, Regional Inspector General for Audit, at (415) 975-4030.

Attachment
 

EXECUTIVE SUMMARY                                                                                                                     4
 
 

INTRODUCTION                                                                                                                                  6
 
 

OBJECTIVES, SCOPE AND METHODOLOGY                                                                             8
 
 

FINDING AND RECOMMENDATIONS                                                                                             9
 

PWBA Needs to Analyze Results from Proactive Targeting Techniques                               9

DOL                                  U.S. Department of Labor

ERISA                              Employee Retirement Income Security Act of 1974

ESIP                                 Enforcement Strategy Implementation Plan

FY                                     Fiscal Year

GAO                                 U.S. General Accounting Office

GPRA                              Government Performance and Results Act of 1993

IRS                                   Internal Revenue Service

OIG                                  Office of Inspector General

POP                                 Program Operating Plan

PWBA                             Pension and Welfare Benefits Administration

ROI                                   Return on Investment
 

The Employee Retirement Income Security Act of 1974 (ERISA) established standards and requirements for the operation of employee benefit plans to protect participants' and beneficiaries' benefits. Noncompliance with ERISA requirements is a significant issue, impacting on the ability of covered plans to deliver promised benefits. PWBA's enforcement strategy is a critical factor for obtaining compliance with ERISA.

PWBA Strategy is Appropriate

Overall, we concluded that PWBA's enforcement strategy is appropriate and has disclosed significant ERISA violations and large monetary results. PWBA's enforcement program relies on a highly knowledgeable staff, committed to ensuring that participants and beneficiaries receive promised benefits. Since 1986, PWBA has developed and refined its enforcement strategy, empowering the Regional Offices, especially in case selection. PWBA has also improved technical assistance efforts to follow up on participant and beneficiary complaints. Finally, PWBA's recent refinements to its enforcement strategy coupled with additional investigative staff, has increased monetary results from $231 million in fiscal year (FY) 1995 to $465 million during the first three quarters of FY 1997.

Analyzing Past Results Should Improve Targeting

PWBA, however, could improve enforcement efforts by reallocating investigative resources to the more effective proactive case selection techniques. PWBA's enforcement program does not fully utilize targeting techniques' results to direct resources to plans with greater potential for ERISA violations. This lack of responsiveness is due primarily to (1) incomplete analysis of program results achieved from resource investments, (2) program goals that are not based on program results linked to resource investments, and (3) Internal Revenue Service (IRS) temporary refusal of access to Service Centers. As a result, PWBA commits disproportionately high resource expenditures to cases less likely to have ERISA violations and low resource expenditures to cases with greater potential for ERISA violations. Enforcement data shows PWBA allocated 1 percent of the investigative resources expended in the first three quarters of FY 1997 to the targeting method responsible for 43 percent of the monetary results from cases opened in FY 1995 and FY 1996.

We believe the enforcement program needs to include a formal analysis of past results. This analysis would provide a needed link between National Office oversight and the decentralized
 

Recommendations

We recommend that the Assistant Secretary for Pension and Welfare Benefits strengthen the agency enforcement program by:

• developing and implementing a periodic analysis of proactive targeting results;

 
• using this analysis to deploy investigative resources to those proactive targeting methods that demonstrate the highest return on investment; and

 
• working with the IRS to resolve the denial of access to the Annual Reports Form 5500 at Service Centers.

 

Background

The Employee Retirement Income Security Act of 1974 (ERISA) established a framework for employee benefit plans, including fiduciary standards, funding levels, penalties for non-compliance, and Federal insurance guarantees for certain pension plans. The U.S. Department of Labor (DOL), the U.S. Department of Treasury and the Pension Benefit Guaranty Corporation share responsibilities under ERISA for protecting the American work force's benefit plans.

The Pension and Welfare Benefits Administration (PWBA) is the DOL agency responsible for enforcing ERISA provisions. PWBA has principal jurisdiction over Title I of ERISA. PWBA's mission is to protect participants' interests in employee benefit plans, and, in particular, to assure that the promised pension, health and other benefits are there when participants or their beneficiaries need them.

ERISA currently covers more than 200 million persons, 6.7 million plans and $3.5 trillion in plan assets. PWBA enforces ERISA requirements over this large universe through a staff of investigators in the National and Regional Offices.

PWBA field investigations are conducted by investigators located in 10 Regional and 5 District Offices throughout the country. Combined civil and criminal investigations during fiscal year (FY) 1996 produced monetary results of $438 million, 540 cases with fiduciary violations, and 82 criminal indictments. Typically, civil investigations account for 97 percent of the investigations opened in a year.

In 1986, PWBA developed a formal enforcement strategy to ensure a comprehensive and consistent long-term approach for enforcing ERISA and selecting plans for enforcement action. The strategy focused on investigating "significant issue" cases with a perceived high potential for fiduciary violations. PWBA's National Office developed resource allocation targets for the Regions to meet such as devoting at least 50 percent of resources to "significant issues" cases. The Regions controlled the remaining 50 percent of resources.

At the beginning of FY 1995, PWBA changed the enforcement strategy. Regional Office Directors were delegated authority to make most investigative resource allocation decisions, with the understanding that individual Regional decisions must complement DOL 1995 Enforcement Strategy criteria and that sufficient resources would continue to be dedicated to investigations involving National Office priorities and projects.

PWBA's enforcement program was funded at $67 million in FY 1997, up from $52 million in FY 1996. Field staff size increased from 494 in FY 1995 to an estimated 582 in FY 1998.
 

We used the following criteria in performing the audit:

• The Employee Retirement Income Security Act of 1974 (ERISA) contains the fundamental criteria for employee benefit plan operations.

 
• The Government Performance and Results Act of 1993 (GPRA) requires agencies to manage operations efficiently and effectively and sets forth a series of requirements to achieve that goal.

 
• The PWBA Annual Performance Plan identifies agency goals and objectives.

 
• The Enforcement Strategy Implementation Plan (ESIP) issued in December 1995 outlines PWBA's enforcement strategy.

Our objective was to determine whether PWBA's current enforcement strategy was appropriate, given the characteristics of the regulated universe and the results achieved from its enforcement program.

Scope

Our audit concentrated on PWBA enforcement program activities between October 1, 1994 to June 30, 1997. We identified 13,929 cases opened by PWBA during that time period.

The audit was conducted in accordance with Government Auditing Standards (1994 Revision) issued by the Comptroller General of the United States.

Methodology

We held an entrance conference with PWBA representatives on February 27, 1997. We contacted the General Accounting Office (GAO) and reviewed past OIG reports to identify prior work related to the PWBA enforcement program. We reviewed ERISA, the Enforcement Strategy Implementation Plan (ESIP) and Regional Program Operating Plans (POPs) to become familiar with enforcement strategy.

We conducted fieldwork from April 1, 1997 through February 13, 1998. We conducted interviews at PWBA headquarters to obtain an overview of the enforcement strategy and understand the role of the PWBA National Office. We judgmentally selected the Cincinnati, Atlanta, Dallas and Boston Regional Offices for additional interviews regarding targeting techniques and results.

We obtained Case Management System (CMS) data for the period October 1, 1989 through June 30, 1997, but concentrated on enforcement activity after October 1, 1994. We analyzed this data using ACCESS software to identify trends and results. We obtained further verification of targeting techniques on 395 judgmentally selected cases through confirmation by PWBA Regional Offices or our review of case files.

An exit conference was held on February 26, 1998.

Overall, we concluded that PWBA's enforcement strategy is appropriate and has disclosed significant ERISA violations and large monetary results. PWBA's enforcement program relies on a highly knowledgeable staff, committed to ensuring that participants and beneficiaries receive promised benefits. Since 1986, PWBA has developed and refined its enforcement strategy, empowering the Regional Offices, especially in case selection. PWBA has also improved technical assistance efforts to follow up on participant and beneficiary complaints. Finally, PWBA's recent refinements to its enforcement strategy coupled with additional investigative staff, has increased monetary results from $231 million in FY 1995 to $465 million during the first three quarters of FY 1997.

PWBA Needs to Analyze Results from Proactive Targeting Techniques

PWBA's enforcement program does not fully utilize targeting techniques' results to direct resources to plans with greater potential for ERISA violations. This lack of responsiveness is due primarily to (1) incomplete analysis of program results achieved from resource investments, and (2) program goals that are not based on program results linked to resource investments. As a result, PWBA commits disproportionately high resource expenditures to cases less likely to detect ERISA violations and low resource expenditures to plans with greater potential for ERISA violations. To be more responsive, the PWBA enforcement program needs to include a national evaluation of the outcomes achieved from proactive targeting techniques. Further, this evaluation should be considered when allocating enforcement resources.

At the beginning of FY 1995, PWBA established its current enforcement strategy. This strategy delegates to Regional Office Directors the authority to make most investigative resource allocation decisions. The PWBA National Office grants this authority in the ESIP which provides Regional Directors the following guidance:
 

• Individual decisions must support the DOL's 1995 enforcement strategy criteria, i.e.:
• target the worst actors and worst offenses;
• protect the most vulnerable populations;
• deter violations with significant penalties; and
• get results swiftly and efficiently.
• Sufficient resources would continue to be dedicated to investigations involving National Office priorities and projects.

In accomplishing their POPs, Regions open cases of two types: proactive and reactive, depending on whether PWBA developed the indication of the ERISA violation or the indication came from an outside source. Generally, Regions give reactive cases priority for action. Regional Directors have the discretion over how to use remaining investigative resources on proactive cases.

Proactive targeting is a major part of PWBA's enforcement program. In FY 1995 and FY 1996, 76 percent of the cases opened were based on proactive targeting. For the first three quarters of FY 1997, 66 percent of case openings were based on proactive targeting.

PWBA identifies the source of proactive cases according to the following:

• 5500 Data Analysis - National Office/ADP Review
• 5500 Data Analysis - Regional Office/ADP Review
• 5500 Data Analysis - Regional Office/ Manual Review
• Regional Office Initiated Case

Plan Selection

In accordance with the overall enforcement strategy, Regional Directors have authority to proactively target or select plans for investigation. Each Region we visited approached plan selection differently.

Regional plan targeting and selection reflected differences among Regions as to economics, industry concentrations, and other similar criteria. Plan selections also reflected the experience and judgment of the Regional Directors and their staff. For example, the Regional Director in one Region delegates the decisions regarding individual proactive plan targeting to a Targeting
 

PWBA's National Office, however, does not perform nor provide the Regions an analysis of the national results of past targeting or plan selection. In headquarters, the Office of Enforcement compiles, tracks and analyzes the CMS data to monitor Regions' achievement of POP goals; however, they do not perform an analysis to determine the more productive proactive targeting methods or to identify methods that are less productive. The Regions have not supplemented their targeting with a national analysis of targeting methods.

We believe one reason for the lack of analysis is that PWBA largely evaluates the Regions on quantitative measurements. PWBA's National Office gives Regions many quantitative goals, among which are cases opened, cases closed, dollar recoveries, fiduciary violations documented, etc. None of these goals, however, measure results against the resources expended.

Regional Directors were primarily concerned with reaching the numerical goals called for in their POPs and, in fact, were generally able to meet the goals. For a goal of cases opened, the projected number of cases were opened. For a goal of cases closed, the projected number of cases were closed. However, without a goal that measures results versus resources, a formal analysis of targeting results was not considered as necessary for the enforcement program.

As a result, nationwide, resources are not being directed to proactive targeting methods that are most effective in identifying potential ERISA violations. As discussed in the following sections, PWBA could be more effective if resources were directed based on past results.

Resource Allocation

We compiled data on investigative results using monetary results and hours charged to cases opened in FY 1995 and FY 1996 based on the four PWBA proactive investigation sources.

We then developed a return on investment (ROI) rate representing the monetary results divided by the investigative hours used. The following table presents individual ROIs for proactive cases.
 
 

Source ROI

As the table shows, the "5500 Data Analysis - Regional Office/Manual Review" was the most productive and efficient proactive source for plan selection with a $1263 per investigative hour ROI. To obtain leads of this type, investigators make field visits to the IRS Service Centers that receive the Annual Reports Form 5500. IRS makes batches of unsorted Annual Reports Form 5500 (excluding Forms 5500-C and 5500-R) available to the investigators. The investigators review plan information, including audit reports, attachments, and the notes to the financial statements. They look for indications of potential problems and plans are selected for further investigation.

The "5500 Data Analysis - National Office/ADP Review" was least efficient. This source produced an ROI of $240 per investigative hour. This targeting method consists of using computer programs to analyze Annual Reports Form 5500 data. The programs use ratios and comparisons to identify plans with potential problems. The Regional Offices use this source at their discretion.

We summarized the investigative hours spent on investigations from each of the proactive targeting methods for the first three quarters of FY 1997 to determine if PWBA considered past ROIs in their resource allocations. The table below illustrates the results of our analysis.
 

Source Hours

Specifically, during FY 1995 and FY 1996, PWBA opened 275 cases resulting from "5500 Analysis - Regional Office/Manual Review." Nineteen of these 275 cases (7 percent) disclosed ERISA violations. Also, these cases produced Monetary Results of $22.3 million, about $81,000 per case. Through the third quarter of FY 1997, PWBA had committed about 1 percent of its investigative resources to this successful targeting technique.

In contrast, 1,692 cases developed through "5500 Data Analysis - National Office/ADP Review" disclosed 47 (3 percent) ERISA violations. These same cases produced Monetary Results of $9.3 million or $5,477 per case. Through the third quarter of FY 1997, PWBA had spent about 6 percent of their investigative resources on this targeting method. Essentially, PWBA allocated six times more resources to investigations started from the method with the lowest ROI rather than the method with the highest ROI. This resource allocation is contrary to what past results indicate would be a more effective resource allocation.

Our analysis indicates that if PWBA had allocated investigative resources to proactive targeting methods at the beginning of FY 1996 based on prior year investigation results, significant increases in ERISA violations and Monetary Results might have been achieved. For example, if PWBA had assigned more investigative resources to investigations developed from the "5500
 

We recognize that recently PWBA has been operating under unique restraints. Specifically, visiting IRS Service Centers to review Annual Reports Form 5500 has become difficult. The IRS is reviewing procedures involving disclosure of tax return information to ensure privacy protections are in place. Since the Annual Reports Form 5500 are technically a tax return, the IRS has denied PWBA access to this information until the disclosure issues are resolved. This prevents PWBA from using its most effective proactive targeting method.

We believe the enforcement program needs to include a formal analysis of past results. This analysis would provide a needed link between National Office oversight and the decentralized targeting approach, producing better information for current resource allocation decisions.

Recommendations

We recommend the Assistant Secretary for Pension and Welfare Benefits strengthen the agency enforcement program by:

• developing and implementing a periodic analysis of proactive targeting results;

 
• using this analysis to deploy investigative resources to those proactive targeting methods which demonstrate the highest ROI; and

 
• working with IRS to resolve the denial of access to the Annual Reports Form 5500 at Service Centers.

 

PWBA responded to the draft report on March 20, 1998. The complete text of the PWBA response is in Appendix A to this report.

PWBA stated:
 

In the past year, we appointed a new Director of Enforcement--whose first task involved reviewing the staffing, structure, and functions of the Office of Enforcement. After consulting with OE staff and regional office staff, we are now preparing a reorganization proposal which includes an expanded focus on analytical review of the various facets of our enforcement program, including targeting activities and nationwide projects. These new functions will be phased in once the reorganization is implemented and the office is fully staffed. With the implementation of the new Enforcement Management System in FY 1999, we anticipate being able to do these internal evaluations more easily. In addition, our

new GPRA performance measures address some of the same issues raised in the draft report, especially the "hit ratio," i.e., how good a job we do in selecting cases for investigation.

We will instruct our regional directors to pay more attention to this type of analysis. However, a certain amount of flexibility must be provided since there may be circumstances in a region which could suggest reasons for an alternative approach, for example, the need to conduct a balanced enforcement program which covers all segments of the filing universe.

We have now been informed that PWBA staff will be permitted to review Form 5500 filings beginning after the main tax filing season of the year. The staff from our Cincinnati Regional Office will be the first to conduct this manual review of 5500s in July 1998. We anticipate that the other regional offices will visit their respective Service Centers later in PY 1998 or during
FY 1999.

OIG Evaluation of PWBA's Comments on the Draft Report

Regarding the OIG recommendation on developing and implementing a periodic analysis of proactive targeting results, and PWBA's response, we acknowledge PWBA's agreement with the recommendation and concur with the PWBA decision to conduct expanded analytical studies of the enforcement program. We do not agree with the statement that such studies ". . . may assist (italics added) in deciding how to use our enforcement resources." OIG is certain that properly constructed studies will be of assistance in resource allocation decision making.

We are concerned that the implementation of this recommendation has been tied to a future possible reorganization which may or may not actually occur. If the reorganization is disapproved or delayed, we expect that PWBA will implement this recommendation in a timely manner. Therefore, this recommendation is resolved and will be closed only when PWBA has implemented its proposed corrective action.

The remaining two recommendations are resolved and closed based on PWBA's response. We acknowledge PWBA's quick response in resolving the problem with access to the IRS Service Centers.
 
 

MARCH 20, 1998
 
 

MEMORANDUM FOR JOHN J. GETEK
                                        Assistant Inspector General
                                            For Audit

                                                / s /
FROM:                            OLENA BERG
                                         Assistant Secretary

SUBJECT:                     PWBA's Enforcement Strategy: Results Need to be Analyzed
                                          To Increase Return on Investment
                                          Draft Audit Report No. 09-98-002-12-121

Thank you for the opportunity to review the draft audit report on ERISA's enforcement strategy. We were pleased to note the OIG's conclusions that our "enforcement strategy is appropriate and has disclosed significant ERISA violations and large monetary results" as well as the favorable comments concerning our "highly knowledgeable staff, committed to ensuring that participants and beneficiaries receive promised benefits."

On balance, we feel that the audit report raised some useful issues for our consideration. We agree that formal evaluations of the enforcement program may assist in deciding how to use our enforcement resources. We would like to note for the record, though, that since 1990, the agency has regularly reviewed progress on its national and regional enforcement initiatives. At each gathering of the agency leadership and senior enforcement managers (which occurs three to four times per year), we discuss progress on enforcement initiatives--and late in each fiscal year, we select the major enforcement issues and projects to be conducted in the upcoming year. Also, PWBA has, in the past, conducted detailed studies of the sources of our cases and analyzed the results according to those sources. However, there has been a lapse in doing these studies because the Office of Policy and Research (which did the analysis) has been too busy with health care-related issues.

In response to the three specific recommendations, we would like to provide the following information:
 

Develop and implement a periodic analysis of proactive targeting results.  In the past year, we appointed a new Director of Enforcement--whose first task involved reviewing the staffing, structure, and functions of the Office of Enforcement. After consulting with OE staff and regional office staff, we are now preparing a reorganization proposal which includes an expanded focus on analytical review of the various facets of our enforcement program, including targeting activities and nationwide projects. These new functions will be phased in once the reorganization is implemented and the office is fully staffed. With the implementation of the new Enforcement Management System in FY 1999, we

anticipate being able to do these internal evaluations more easily. In addition, our new GPRA performance measures address some of the same issues raised in the draft report, especially the "hit ratio," i.e., how good a job we do in selecting cases for investigation

Use this analysis to deploy investigative resources to those proactive targeting methods that demonstrate the highest return on investment.  We will instruct our regional directors to pay more attention to this type of analysis. However, a certain amount of flexibility must be provided since there may be circumstances in a region which could suggest reasons for an alternative approach, for example, the need to conduct a balanced enforcement program which covers all segments of the filing universe. The manual review of 5500 forms in the Service Centers has focused only on the large filers and we feel it is important to have a well-balanced approach to our enforcement operations.

Work with the IRS to resolve the denial of access to the Annual Reports Form 5500 at Centers.  As we promised at the exit conference held on February 26, 1998, the agency has raised the problem of access to the IRS Service Centers with senior level staff at the IRS. The IRS had restricted our access because of concerns related to the possible inadvertent disclosure of taxpayer information. We have now been informed that PWBA staff will be permitted to review Form 5500 filings beginning after the main tax filing season of the year. The staff from our Cincinnati Regional Office will be the first to conduct this manual review of 5500s in July 1998. We anticipate that the other regional offices will visit their respective Service Centers later in PY 1998 or during FY 1999. Of course, once the new EFAST system is in place, the regional offices will have direct, immediate access to these filings.