3 Steps to a Smoother Plan Audit

audit

By Allison Brecher, General Counsel, Vestwell 

If your plan has 100 or more participants, it’s time to prepare for an annual plan audit. A typical audit examines two things: compliance with various tax and regulatory requirements and the accuracy of financial reporting on the plan’s Form 5500. Whether your plan already has 100 participants or you anticipate growing to this size in the future, there are steps you can take now to make the audit process go more smoothly – and save you some headaches along the way.

1. Collect Important documents

Every audit is different, depending on the nature and complexity of your plan, but one thing is certain: the auditors will want to see documentation. These documents must substantiate the amounts selected for processing contributions, benefit payments, deferral changes, and all other employee and employer contributions. As a best practice, keep the following documents in an easily accessible place:

  • Adoption agreements and amendments
  • Payroll files
  • Benefit selection forms
  • Contracts with plan service providers
  • Meeting notes from plan sponsor’s benefit committees, if applicable
  • All other plan-related documentation

As a best practice, work with your recordkeeper to store and coordinate the delivery of these documents to the auditor.

 

2. Make sure your plan’s operations follow the plan document

Once you have collected relevant documents, ensure your plan’s operations are running as outlined. You can save considerable time by reviewing the plan documents for ambiguous provisions as well as by making sure the plan is being administered in a way that’s consistent with the your intentions. This includes looking at things such as the effective date of plan amendments and current loan policy statements. Make sure the plan’s service providers also have the current plan documents and confirm they are following them.

One particular area to focus on is defining what “compensation” is eligible for deferrals and employer matches. Some plans define compensation as “all compensation reported for W-2 purposes” which would include salary, tips, and bonuses and exclude moving expenses and deferred compensation. A mismatch can occur when the payroll system is set up without aligning with the plan’s definitions, resulting in overpayments to participants. This can be a time consuming and expensive issue to correct down the road.

 

3. Automate processes where possible

Manual procedures are prone to error, so evaluate areas where administration can be automated. For example, auto-enrollment and auto-escalation are effective ways to ensure that all eligible employees are aware of your retirement plan offering and have the opportunity to participate or opt-out. Another good automation is around payroll integration. Ask your recordkeeper if it can obtain payroll files and data fees directly from your payroll provider so that you don’t have to spend time following up with your employees. This will minimize the risk of denying eligible employees access to the plan.

Going through a plan audit can seem like a daunting task, but taking the time to prepare in advance will make  managing your fiduciary responsibilities much easier. Between collecting plan documents, ensuring you and service providers are aligned, and automating processes, you’ll establish habits that help keep your plan compliant this year and for years to come.

Yes, Plan Sponsors are Still Fiduciaries

 

fiduciary

You may be confused by the recent news about the DOL Fiduciary Rule: Was the rule declared invalid? Will the SEC move ahead with its own Fiduciary Rule?  Will the Supreme Court issue a decision? Your confusion is appropriate as the status and future of the DOL Fiduciary Rule is still in flight. However, one constant remains and that is the Plan Sponsor’s fiduciary duty to the Plan and its participants.

ERISA and the DOL

The DOL’s Fiduciary Rule was finalized in 2016 and was supposed to go into effect at the start of 2018.

This rule was designed to eliminate financial advisor conflicts of interest when dealing with client retirement accounts. While it had provisions relating to 401(k) plans, it’s important to remember that any delay or even the possible nullification of the rule does not impact the fiduciary duties of a 401(k) plan sponsor.

Any financial advisor who works with plan sponsors can help ensure that their clients are aware of this.

A sponsor’s fiduciary role

 ERISA cites five standards of fiduciary care on sponsors of retirement plans. These boil down to the fact that a plan sponsor must make all decisions with the best interests of the plan participants in mind.

One key standard that has received attention in recent years is the responsibility to keep expenses low for plan participants.

While there is no firm standard for this, this issue has been the basis of a number of lawsuits against plan sponsors. Most of these suits have been brought against large employers, however, in recent years, even smaller plans have not been immune.

Reach out to clients now

 Periods of market volatility signal good opportunities to reach out to your current and prospective clients.

Start by confirming that their current plans are low cost and perform relative to their asset class peers. Find out:

  • Are all fees and expenses transparent, both those that are paid from the participant’s accounts and those paid by the sponsor?
  • Is there a process in place to select, monitor, and (when needed) replace investment choices?

Ideally, your client has an Investment Policy Statement in place for the plan. A solid, consistent, and documented investment process is a great way to demonstrate that the sponsor is acting in a responsible fiduciary capacity.

Beyond just meeting their fiduciary obligations, savvy plan sponsors want to provide the best possible retirement vehicle for their employees (and themselves) to ensure that employees can retire on time.

Advisors are also fiduciaries

 As an advisor you have two options as a fiduciary.

A 3(21) fiduciary serves as a co-fiduciary with the plan sponsor making all final decisions as to the plan’s investments and other decisions including the selection of service providers.

A 3(38) fiduciary has the discretion to make all investment and provider decisions; this is delegated to the advisor by the sponsor.