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Add Value to Your 401(k) Plan, with an Audit?

The audit of your 401(k) plan should not be regarded as just a mere compliance necessity to keep the Department of Labor off your back, but an invaluable look into the massive moving cogs that make up the retirement assets your employees have placed their trust and hard-earned dollars. These massive cogs consist of financial advisors, third-party administrators, recordkeepers, custodians, human resource and payroll departments, and the plan auditor. Among all these cogs, how can an audit bring value? One word, insight.

The 401k auditor can bring insight to all the parties involved in the plan’s operation by taking an eagle eyes point-of-view and offering recommendations to beef-up controls or procedures in place in any of the cogs of the plan. In 401(k) plans, it is difficult for the “left hand to see what the right hand is doing.” Each of the parties involved are basically operating on a transactional basis. As soon as these plans are created and up and running, they can sometimes fall into the trap of operating on a near autopilot manner.

401(k) audits can add value to the company and plan operations in the following manners:

  • Spotting Late Employee Contributions: This is one common area that auditors hit with a fervor of constant frequency. These late contributions, if not corrected timely, can result in some costly fees. The trustee/custodian doesn’t always have the most reliable payroll date information and aren’t always looking to see how long it takes for a plan sponsor to transmit the deferrals. The timing of the deposits are many times looked at as being the plan sponsors’ responsibility, but many plan sponsors are unsure or simply confused on the true timeline these employee contributions are to be remitted to the trust. Auditors gather the payroll date information and the dates the contributions hit the trust from the plan sponsor and the trustee/custodian, respectively. The auditor can then offer recommendations on how to ensure that late remittances do not reoccur.

  • Ensuring Sponsor-to-Participant Fee Disclosures are Occurring, and the Material in the Disclosures are Adequate: The DOL passed a ruling in 2012 regarding disclosures to participant directed individual plans’ participants. Many plans have a process established that the third-party administrators handle the distribution of these disclosures, therefore it is pivotal that these disclosures are reviewed by the auditor during their audit procedures. There are specific guidelines that must be followed in these disclosures, such as disclosing general plan information, administrative expense information, total annual expenses shown as a percentage of assets and the dollar amount for each $1,000 invested, etc. The auditor should review this information to ensure the plan sponsor is compliant with current DOL regulations regarding fee disclosures to plan participants.

  • Testing Deferrals on Plan Eligible Wages: The key to this testing is deciphering what are “plan eligible” wages. The plan documents clearly state the wage types that are plan eligible. There are usually three different types, which are W-2 wages, 3401(a) wages, and 415 safe harbor wages. All three of these types of wages have the option to either include or exclude post severance compensation. Plan sponsors, depending on the type of plan documents utilized, can exclude bonuses and commissions from plan eligible wages. They also have the option to allow the participant to choose whether to allow deferral deductions on bonus and commission pay. Carefully reading through all the plan documents and understanding the exact wages that are eligible to have deferrals on is an important step in preparing the audit by the plan auditor. If there are any deferrals that were missed or mistakenly pulled on ineligible wages, then a costly correction may need to be made. The third-party administrator nor the plan sponsor may realize the incorrect wages are being used for plan deferral purposes. The plan auditor may be the only one that can decipher this error so corrections can be performed, and recommendations can be offered by the auditor to beef-up controls that can be utilized to ensure this error does not reoccur.

There are many areas of the audit that the plan auditor can assist in adding value to the plan and the plan sponsor. The above issues are only scratching the surface in areas I have seen over my tenure as a plan auditor. For other useful tips and to ensure you receive a valuable audit from your plan auditor, be sure to check out my other articles at

And the companions, known as the 401k.9s

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