I recently spoke to CPAs gathered for their annual, national Employee Benefits Conference, and I provide a summary of my talk on the Value of Audits for Employee Benefit Plans here below.
Auditing 401(k) plans may not be the most exciting or glamorous function ERISA attorneys, tax advisors, or CPAs supervise, but –- for the employers/clients out there who sponsor 401(k) plans -- it’s important to think about a 401(k) audit as more than just a means of detecting basic compliance issues.
The term “compliance” suggests a single audit benchmark that is overarching. It’s easy for us to think of auditing 401(k) and other forms (to include 403(b), 457(b), 457(f), ESOP, etc.) of an employee benefit plans for compliance issues in terms of minimum standards employers must meet to ensure so as not to run afoul of legislative, procedural, and reporting requirements.
There’s nothing wrong with that, of course. It’s foundational in terms of the services retirement plan experts must perform. After all, the Department of Labor and the IRS are usually watching. But there is more to just auditing a plan, at least potentially, in terms of adding more value and healthy inquiry for the employers/clients who sponsor these.
401(k) audits are often worthwhile even when not required, however unpopular that recommendation may be. Audits (or even self-policing on the part of an employer) can provide excellent value for money spent in several key respects.
Adding Value and Credibility: The Importance of 401(k) Audits
Obviously, statutory compliance drives 401(k) audits, but their real importance rests on principles the regulatory framework is designed to translate into reality. These principles include adherence to required practices and procedures, administrative and financial consistency and reliability, present and future plan viability, clarity and efficacy of internal financial controls, and more.
In simpler terms, professionally qualified and impartial third-party audits ensure accuracy, transparency, and accountability to all interested parties, including a plan’s participants and management, the IRS, the Department of Labor, and plan sponsors. Such audits also make it less likely that “slack” can develop over time periods in which no audit would otherwise be required.
Thus, even when a 401(k) plan’s size doesn’t trigger a statutory audit and a Form 5500 return in a given year, there is utility for all parties in opting for the audit anyway. It provides “above and beyond” assurances for participants as to compliance, financial health, and internal controls. It affords reassurance to all parties that no ongoing errors exist and that administration is effective and proactive year-to-year.
A regular, voluntary audit (or self-policing on the part of the employer) also minimizes the likelihood of omissions, procedural or substantive errors, or actual malfeasance in ways that little else can. Regular audit can enhance regular fraud detection measures. So, particularly when a plan’s size approaches the statutory threshold, I recommend a 401(k) audit to employer/clients (and their auditors).
Value Targets: The Benefits of 401(k) Audits for Clients
In addition to compliance specifics under regulatory and procedural rules, there are areas of benefit that both experience and common sense should suggest to us as auditors and ERISA professionals.
1. Global Oversight, Insight, Coordination, and Cooperation
A qualified independent audit can provide the sort of broad perspective employers/clients may find hard to achieve for themselves because of their proximity to the plan and its infrastructure. Broader perspective comes from sufficient distance and detachment to cover the forest AND the trees. The perspective can promote keener insight, better coordination among organizational units within the plan, improved error detection, and more effective cooperation among interested parties.
2. Enhanced by Audit: Timeliness and Transparency
The oversight provided through regular formal plan audits can help to identify areas where clients can improve management of interlocking timelines and correct issues of intra-plan transparency that don’t rise to non-compliance levels.
3. Guarding the Coffers: Audits and Fraud Detection
Annual fully compliant 401(k) audits may be useful in helping to uncover fraud that might otherwise go undetected for extended periods. In such cases, an ERISA consultant would have a hard time overstating the audit’s value to clients.
Fraud and embezzlement do occur with employee benefit plans, and our own employers/clients had to confront: crimes like these: a comptroller paying off 401(k) loans not with her own money, but rather the employer’s bank account; a payroll processor cashing out others' 403(b) accounts and sending to an address that the payroll processor himself sets up; a TPA running off with money set aside for employee health insurance (with that TPA handing money for many companies and many employees); a TPA and record keeper overstating profit sharing contributions owed to employees, but keeping the delta for itself.
I discuss Fraud and Embezzlement in more detail in a separate blog post.
Getting Serious about the 401(k) Audit: Not Just an Option
Advising CPAs (with respect to their employers/clients) to adopt a practice of routine 401(k), 403(b), 457(b), 457(f)) to perform audits even when not strictly required under legislation to do so may be a hard sell. Still, consultants to employee benefit plans owe it to them to be clear about the benefits they can derive and the pitfalls they can avoid by doing so.
Educating the concerned parties as to the benefits –- that is the means by which to justify the costs involved.