With trepidation, I slowly opened the envelope from the Department of Labor hoping that it was only a routine communique. My worst fears were realized when, upon reading it, I discovered that our 401(k) plan was being audited. Along with the letter was a three-page list of documents DOL had requested and the date representatives from the agency would be coming onsite. Gulp!
Two months have passed since I received that letter. The DOL audit has since been closed, and we all survived the process - with no fines, and several lessons learned.
Here's what you need to know to make it through the audit process:
1. Organization is key. The list of items DOL will want to see is lengthy. For our audit, it represented roughly 1,000 pages of documentation. Take the time to diligently label each item with the corresponding number from the DOL request list. This will help you keep track of which items you might still need to gather, as well as provide you with an easy way to reference documents if your auditor has further questions about them later in the process. Additionally, make sure you've reviewed all of the documentation you're providing the auditor and that you understand it. If you do not understand some (or any) of it, then ask for clarification.
2. Provide all requested documentation or ask for more time. If you are unable to gather all of the requested documentation due to logistical issues (i.e., information is in off-site storage or a key person is on vacation), then have a discussion with your auditor and request additional time. However, if you can provide all of the documentation within the requested timeframe, do so.
If there is documentation that you do not have, or does not apply to your plan, inform the auditor that you are not providing that specific item and why. For example, if your plan doesn't have any loans, you need to tell the auditor this information so that they do not come back and ask for that information later.
3. Understand your plan's fees. Although fee disclosure notices to participants might not be going out until August, DOL is very interested in ensuring that plan sponsors have a firm grasp on fees. Much to our surprise, a large portion of the onsite interview consisted of very detailed questions regarding the type of funds (retail vs. institutional), whether a fee analysis had been conducted, if the investment policy considered fees, what discussions had occurred within the 401(k) committee regarding fees, and to what extent we felt that the fees and charges were competitive for a plan of our size. We spent well over half of the onsite interview talking about all of the fees, any revenue sharing arrangements, our investment advisor compensation arrangements, and all of the financial details of the plan.
4. Respond promptly to inquiries. There will be items the auditor will want to delve into more deeply, and you will receive several follow-up questions. Thoroughly research the questions and provide answers as promptly as possible. If, for some reason, you do not know the answer, then let your auditor know. For my audit, the time period of the audit was prior to my time with the company and covered time with a prior recordkeeper. There were questions that I simply could not answer due to the time period in question. As long as any potential issue has been corrected, you can show that, despite what might have happened in the past, the issue is now fixed. The more time it takes to respond to your auditor's request, the longer your audit will drag on.
With some organization and a working knowledge of your plan and plan administration procedures, you too can survive an audit and, with any luck, close it out in a short amount of time.
Contributing Editor Shana Sweeney is an SPHR with more than a decade of experience. She can be reached at firstname.lastname@example.org.
Choosing an auditor
Federal law requires employee benefit plans with 100 or more participants to have an audit as part of their Form 5500 filing requirements. Here are some FAQs about audits, excerpted from the DOL's Employee Benefits Security Administration website.
Should a plan auditor have experience in auditing employee benefit plans?
One of the most common reasons for deficient accountants' reports is the failure of the auditor to perform tests in areas unique to employee benefit plan audits. The more training and experience that an auditor has with employee benefit plans, the more familiar the auditor will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans.
In some instances, a less experienced auditor may be assigned to perform routine audit procedures in order to reduce audit costs. When this happens, you should confirm that an experienced employee benefit plan auditor will review his/her work, as well as perform the more complicated audit procedures.
Can I limit what the auditor reviews?
The administrator of an employee benfit plan can limit an audit when plan assets are held by banks or insurance companies and written certifications are provided by the institutions holding those assets. Consult with your accountant, attorney or plan advisor to determine whether limiting the scope of an audit is appropriate.
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