Auditing 401(k) Plans

408(b)(2) Service Provider Fees

408(b)(2) Service Provider Fees

ERISA section 408(b)(2) establishes specific disclosure obligations for plan service providers to ensure that responsible plan fiduciaries are provided the information they need to make better decisions when selecting and monitoring service providers for their plans.

 

 

 

 

 

 

 

 

 

 …

404(a) Plan Fee and Expense Information

404(a) Plan Fee and Expense Information

ERISA 404(a) requires the disclosure of certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in participant-directed individual account plans like 401(k) plans. This rule will ensure that participants who direct their plan investments have access to the information they need to make informed decisions regarding the investment of their retirement savings, including fee and expense information.

 

 

 

 

 

 

 

 

 

 

 …

Participant Loans

Participant Loans

The FASB ASU No. 2010–25, was issued in September 2010 to amend generally accepted accounting principles related to how loans to participants should be classified and measured by defined contribution plans. The previous standard required loans to participants to be classified as plan investments which are generally measured at fair value. The new standard requires loans to participants be classified as notes receivable from participants and measured at their unpaid principal balance plus any accrued but unpaid interest.

 

 

 

 

 

 

 

 

 

 

 …

  • Home
  • New Regulations and Standards

  • You should know…

    Administrators of a 401(k) plan subject to ERISA must file an annual report (Form 5500).
    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.
    ”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 contributions.
    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 - failure to properly report on and/or include the required supplemental schedules relating to ERISA and DOL.
    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.
    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 - failure to test eligibility to receive benefit payments.
    Common audit deficiency - testing of payroll data is insufficient.
    “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 - improper use of limited scope exemption because financial institution did not qualify for such an exemption.
    Common audit deficiency - failure to obtain proper certification for a limited scope audit.
    Common audit deficiency - no audit documentation for testing participant data.
    Common audit deficiency - failure to test employee deferrals.
    Common audit deficiency - no testing of investment income allocation to participants.
    Common audit deficiency - no testing of participant eligibility or forfeitures.
    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.
    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 - inadequate or missing disclosures.
    Plans whose sole assets are insurance contracts that fully guarantee benefit payments are not required to be audited.
    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.
    Common audit deficiency - failure to understand testing requirements on a limited-scope engagement.
    Common audit deficiency - no audit work performed for benefit payments.
    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.
    Common audit deficiency - no audit work performed for related parties.
    Common audit deficiency - failure to test timeliness of participant contributions
    Common audit deficiency - inappropriate reliance on SOC 1 reports.

New Regulations and Standards

Auditors and plan fiduciaries need to stay educated on industry developments and changes.  Over the last couple of years, several new standards and regulations have been made effective.  Below are listed a few of the major changes.

Participant Loans

The Financial Accounting Standards Board (FASB) Accounting Standard Update (ASU) No. 2010–25, was issued in September 2010 to amend generally accepted accounting principles related to how loans to participants should be classified and measured by defined contribution plans. The previous standard required loans to participants to be classified as plan investments which are generally measured at fair value. The new standard requires loans to participants be classified as notes receivable from participants and measured at their unpaid principal balance plus any accrued but unpaid interest.

Service Organization Reports

The AICPA has updated the reporting on controls for service organizations from that of a single, antiquated standard (SAS 70) to a new Service Organization Control Report (SOC) framework. This occurred with the adoption of the new standard – Statement on Standards for Attestation Engagements (SSAE) No. 16.  SSAE 16 had an effective date of June 15, 2011 with earlier implementation permitted.

408(b)(2) - Service Provider Fees and Services

ERISA section 408(b)(2) establishes specific disclosure obligations for plan service providers to ensure that responsible plan fiduciaries are provided the information they need to make better decisions when selecting and monitoring service providers for their plans. The final rule requires covered service providers to provide fiduciaries with the information they need to :

  • Assess reasonableness of total compensation, both direct and indirect, received by the service provider , its affiliates, and/or subcontractors;
  • Identify potential conflicts of interest; and
  • Satisfy reporting and disclosure requirements under Title I of ERISA .

The final regulation was effective for both existing and new contracts or arrangements between plans and service providers as of July 1, 2012. Service providers not in compliance as of July 1, 2012, will be subject to the prohibited transaction rules of ERISA section 406 and Internal Revenue Code section 4975 penalties.

404(a) - Plan Fee and Expense Information

ERISA 404(a) requires the disclosure of certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in participant-directed individual account plans like 401(k) plans. This rule will ensure that participants who direct their plan investments have access to the information they need to make informed decisions regarding the investment of their retirement savings, including fee and expense information.

The final regulation requires plan fiduciaries to give participants quarterly statements of plan fees and expenses deducted from their accounts and to give workers core information about investments available under their plan including the cost of these investments.  The final regulation also requires plan fiduciaries to present information in a format that makes it easier for participants to comparison shop among the plan’s investment options.

 

© 2026 401(k) Plan Audits
Powered By DynamiX