Qualified Retirement Plan Audits Offer Multiple Benefits for Employers
Employer-sponsored qualified retirement plans can be valuable recruiting and retention tools. But they also bring significant administrative responsibilities. For many organizations, those responsibilities include obtaining an independent audit of the plan’s financial statements as required under the Employee Retirement Income Security Act (ERISA).
Although such audits may seem like a hassle, they can benefit your organization in multiple ways. Plus, recent legislative changes — including provisions under the SECURE 2.0 Act — have expanded participation requirements and increased administrative complexity, making careful oversight and periodic review more important than ever.
Primary purpose
Employer-sponsored retirement plans that may require audits include traditional pensions, 401(k)s, ERISA-covered 403(b)s and profit-sharing plans. A primary purpose of an audit is to obtain an independent opinion on the plan’s financial statements and required supplemental schedules. In the process, the audit may identify operational or compliance issues related to applicable federal rules enforced by the U.S. Department of Labor (DOL) or the IRS. An independent audit reassures stakeholders that your plan’s financial statements offer reliable information, too.
Generally, ERISA requires “large” plans to include an audit report with their annual Form 5500 filing. For many defined contribution plans, such as 401(k)s, large-plan status is typically determined by the number of participants with account balances at the beginning of the plan year, subject to certain exceptions. ERISA also generally requires plan administrators to prepare plan financial statements in accordance with U.S. Generally Accepted Accounting Principles.
Not every employer-sponsored retirement plan is required to undergo an annual audit. Many smaller plans are exempt, and some growing plans may qualify for relief under special rules for participant counting. Even when an audit isn’t required, employers should still monitor participant counts, maintain strong records and periodically review plan operations.
Qualifications and scope
It’s important to choose your auditor carefully. You’ll of course want to consider the prospective provider’s professional qualifications, experience and licensing. But, as you do, ensure that the auditor you engage is independent and doesn’t have financial or business relationships with the plan, your organization (the plan sponsor) or related parties that could impair objectivity. For example, the DOL doesn’t view a plan auditor as independent if the auditor also maintains the plan’s financial records.
The American Institute of Certified Public Accountants offers guidance on creating a request for proposal (RFP) for a qualified plan audit. An effective RFP describes the scope of the audit — including its objectives, special considerations and expected schedule.
Advantages to leverage
A qualified retirement plan audit can provide several practical advantages beyond satisfying ERISA requirements. These often include:
Uncovering administrative errors. An audit may reveal that employee deferrals weren’t deposited in a timely manner, employer matching contributions were calculated incorrectly or participant eligibility rules were applied inconsistently. Catching these or other issues early can give your organization a chance to correct them before they trigger penalties, participant complaints or more extensive regulatory scrutiny.
Strengthening internal controls. Depending on the plan, auditors typically review processes related to contributions, distributions, loans, hardship withdrawals, investment reporting and participant data. In doing so, they may identify gaps in documentation, approval procedures or segregation of duties that expose your organization to the risk of errors, misinterpretation or even fraud.
Improving fiduciary oversight. Plan sponsors have a responsibility to act in participants’ best interests. An audit can paint a clearer picture of whether the plan is being operated in accordance with its governing documents and applicable rules. This can enable leadership to better understand where responsibilities lie among internal staff, a third-party administrator, investment advisors and other providers.
Boosting employee confidence. It’s not often talked about, but retirement benefits are deeply personal. These are funds that participants may count on in the future. A well-executed audit can contribute to employee trust.
Plan (and people) protection
If your organization is subject to ERISA, don’t think of a qualified retirement plan audit as a mere regulatory formality. Consider it a valuable opportunity to confirm that you’re administering your plan properly and optimally. Doing so helps protect both your organization and its people.
Whether your plan requires an annual audit or you simply want to strengthen its administration, professional guidance can provide critical insights. Contact us to discuss your responsibilities as an employer-sponsor and the steps you might take to keep your qualified plan on solid footing.
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