Auditing 401(k) Plans

Fiduciary Legal Obligations

Fiduciary Legal Obligations

Fiduciaries of a benefit plan have certain legal obligations to employees who participate in a plan.  The fiduciaries must act solely in the interests of participants and beneficiaries, for the purpose of providing benefits and paying reasonable plan expenses.  Fiduciaries must perform their functions in a prudent and vigilant manner and must comply with any written documents that govern the plan.

 

 

 

 

 

 

 

 

 

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The Plan Document

The Plan Document

The plan document governs the operation and administration of the plan.  The named fiduciary and the plan administrator must understand the various details of the plan in order to ensure that the plan is operated in accordance with the plan document.

 

 

 

 

 

 

 

 

 

 

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Third Party Administrators

Third Party Administrators

Plan sponsors often believe that once they have contracted with a trustee or custodian or third party administrator for plan management and recordkeeping that their obligations are satisfied.  Regardless of the contracts with service providers, the plan sponsor is still the plan fiduciary and must maintain sufficient documentation to support the transactions that have occurred in the plan.

 

 

 

 

 

 

 

 

 

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    Common audit deficiency - no testing of investment income allocation to participants.
    Common audit deficiency - inadequate or missing disclosures.
    Common audit deficiency - failure to test employee deferrals.
    ”Large” 401(k) plans, generally meaning those plans with 100 or more participants, must file an audit with the annual Form 5500.
    Common audit deficiency - no audit work performed for related parties.
    Common audit deficiency - no testing of participant eligibility or forfeitures.
    Common audit deficiency - failure to understand testing requirements on a limited-scope engagement.
    Common audit deficiency - failure to test timeliness of participant contributions
    It is important for the auditor of a 401(k) plan to have the knowledge, proficiency and competency to perform an efficient and effective audit which will stand up to the scrutiny of the DOL.
    Common audit deficiency - failure to test eligibility to receive benefit payments.
    “Large” plans that have a short plan year of seven months or less may elect to defer (but not eliminate) the audit requirement.
    Common audit deficiency - no audit work performed for benefit payments.
    Generally, a plan is considered a “large” plan if it had 100 participants at the beginning of the plan year and a “small” plan if it had fewer than 100 participants at the beginning of the plan year.
    Common audit deficiency - improper use of limited scope exemption because financial institution did not qualify for such an exemption.
    A “large” plan will file a Form 5500 with a Schedule H and a “small” plan will file a Form 5500 with a Schedule I.
    Quality audits for 401(k) plans are imperative, not only because they help ensure plan compliance for the benefit of the participants, but quality audits are important because the DOL can reject the annual Form 5500 filing when the DOL determines an audit failure has occurred.
    The “80-120 rule” will allow the plan to continue to file as a “small” plan (and avoid the audit requirement) indefinitely until the plan exceeds 120 participants at the beginning of a plan year.
    Common audit deficiency - testing of payroll data is insufficient.
    Administrators of a 401(k) plan subject to ERISA must file an annual report (Form 5500).
    The auditor of a 401(k) plan must be familiar with ERISA, tax, and DOL laws and regulations and they must be familiar with special requirements of 401(k) plans.
    Common audit deficiency - failure to obtain proper certification for a limited scope audit.
    Common audit deficiency - failure to properly report on and/or include the required supplemental schedules relating to ERISA and DOL.
    Under the “80-120 rule”, if a plan has between 80 and 120 participants as of the beginning of the plan year, it may elect to file the same category (Schedule H or Schedule I) of form 5500 it filed the year before.
    Common audit deficiency - no audit work performed for contributions.
    The DOL and the AICPA indicate that 401(k) audits have an unnacceptably high rate of deficiencies and the DOL can reject any Form 5500 with a deficient audit.
    Plans whose sole assets are insurance contracts that fully guarantee benefit payments are not required to be audited.
    Common audit deficiency - inappropriate reliance on SOC 1 reports.
    Common audit deficiency - no audit documentation for testing participant data.

Fiduciary Responsibilities

ERISA requires every plan to have at least one named fiduciary with authority to manage the plan.  In a corporate setting, the employer is usually the plan sponsor which makes them the plan fiduciary. The named fiduciary is typically an individual employed by the plan sponsor and given the ultimate responsibility for oversight of the plan.  Also, the employer is oftentimes the plan administrator and/or trustee.  The plan administrator and the trustees are automatic fiduciaries by the nature of their positions.

Fiduciaries of a benefit plan have certain legal obligations to employees who participate in a plan.  The fiduciaries must act solely in the interests of participants and beneficiaries, for the purpose of providing benefits and paying reasonable plan expenses.  Fiduciaries must perform their functions in a prudent and vigilant manner and must comply with any written documents that govern the plan.

The plan document governs the operation and administration of the plan.  The named fiduciary and the plan administrator must understand the various details of the plan in order to ensure that the plan is operated in accordance with the plan document.

Plan sponsors often believe that once they have contracted with a trustee or custodian or third party administrator for plan management and recordkeeping that their obligations are satisfied.  Regardless of the contracts with service providers, the plan sponsor is still the plan fiduciary and must maintain sufficient documentation to support the transactions that have occurred in the plan.  Therefore, the plan sponsor should be able to answer questions and provide support and documentation to assist the auditor throughout an audit engagement.

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