By Arris Reddick Murphy

One universal fiduciary responsibility is ensuring that an employer’s 401(k) plan is being administered in accordance with its terms and applicable law. This includes complying with the Internal Revenue Code, the Employee Retirement Income Security Act (ERISA), and the regulations under both. 

Plan administration duties have a lot of moving pieces, and when you add in the fact that rules are sometimes modified and expanded, it is challenging to stay ahead of the responsibilities that may require plan amendments and procedural changes. In addition, employer-initiated plan design changes and corporate transactions, such as mergers, acquisitions, and spin-offs, also create a need to conduct plan document and procedural reviews to ensure compliance.

In an effort to identify any issues and address them in a timely manner, plan sponsors may want to establish and maintain an internal audit process. Forming a team — with representatives from each department that touches the retirement plan — is a prudent way to stay abreast of plan developments while documenting any changes or updates as they occur. 

This column takes a look at best practices and benefits of establishing an internal plan audit team.

Background

Plans with more than 120 participants must undergo an independent audit, so the internal team assembled to review the plan’s administration can serve a dual role. It can ensure that internal controls are being adhered to and can serve as a resource for questions that arise as the team works with the external auditor to deliver requested documentation on time. 

The internal audit team also may play a key role, should the plan receive an audit or investigation notice from the Internal Revenue Service (IRS) or the U.S. Department of Labor (DOL). In addition to copies of the plan’s governing documents and participant demographic information, the notice likely will request substantial documentation. This may include, among other things, recent determination letters, agreements with service providers, committee meeting minutes, trust statements, contribution records, fiduciary insurance policies, and a list of plan fiduciaries. 

Knowing where the requested documentation is located and who to contact about it will save time and allow for a more responsive agency review.

Forming a team

The staff involved in 401(k) plan administration will vary, depending on the size and complexity of the plan, and the level of services provided by the plan’s service providers. Presumably, internal audit team members will comprise representatives from benefits or human resources, the plan’s committee, retirement services, payroll, accounting or treasury, communications, and legal.

Once the team is assembled, members will be charged with tracking any events during the most recent audit period that will affect plan administration. This task likely requires identifying internal and external contacts (for example, with the plan’s service providers) for participant data and document requests. Documenting the events and related information, including applicable dates, participant counts, and the amount of plan assets involved, also will be standard for the annual review.

The following list is intended to provide a guide for the internal team to establish roles and responsibilities. The list is not intended to be conclusive, as the needs will vary by plan. The team should consider these aspects of plan administration:

• Legal—Tracking of any changes in applicable law, regulatory updates, or agency guidance is needed to make sure the plan is being administered in a compliant manner. This monitoring should confirm that any required plan amendments are prepared and adopted by the deadline in the applicable regulation. In addition, it will be critical to track any compliance matters, plan errors and corrections, and pending or threatened litigation that involve the plan. Threatened litigation may perhaps come in the form of a letter of complaint submitted by a plan participant regarding difficulty in receiving his or her benefit or, more commonly, a discrepancy in the participant’s benefit amount.
• Accounting—This area involves reviewing reports reflecting contributions and disbursements from the plan trust, and reconciling monetary amounts to make sure the records balance. Making comparisons for Form 5500 and Form 1099 reporting purposes is necessary, so that the amounts sync. 
• Retirement Services—The appropriate members of the team should know where to go to obtain a plan’s records—such as trust statements, sample participant statements, fee disclosures, and financial statements—as well as service provider contacts for requesting updated copies. Monitoring loan and hardship distribution procedures to ensure they match those described in the plan’s governing documents will uncover any gaps or inconsistent practices.

• Benefits—Any new companies being acquired, new plans adopted, or mergers or termination of any existing plans will be worth noting when looking at plan administration and possible changes. Additionally, any changes in the plan’s service providers — such as a recordkeeper, trustee, or investment manager — may result in administrative changes. Some of the changes may be visible to the plan participants and should be disclosed.

• Plan Committee—Maintain meeting minutes and a record, including applicable dates, of how any fiduciary decisions were made. Record decisions related to any changes in the types or classes of investments available in the plan, such as the addition of an investment option or the removal of a poorly performing option, or changes to adopt a lower-cost share class. It is important to make sure that related disclosures are communicated promptly to plan participants.
• Payroll—Pull employee census information and send it along to the recordkeeper. The file may also contain participant hire and plan-entry dates for enrollment tracking and employer-match purposes. Provide compensation information and contribution reports so that a comparison may be done to determine if the terms of the plan are being properly administered in terms of the compensation being used to calculate contribution amounts.

Anticipating questions

During an independent audit, an officer should be prepared to discuss whether the plan sponsor has been contacted about the plan by the IRS or DOL for any reason; most commonly, this correspondence regards plan errors or participant complaints. It is important to maintain documentation of the agency response as part of the plan records. Also, the auditors will ask whether there has been any need to involve the plan’s internal or external legal counsel for situations related to the plan (such as beneficiary disputes).

To the extent there is pending or threatened litigation, legal counsel will be expected to share details so that the auditors have sufficient information to determine whether the plan’s assets are at risk. Questions regarding any plan terminations or mergers, layoffs, downsizing, or other corporate actions that will affect the plan’s participant size and assets may arise during the discussion.

Being selected by a regulatory agency for a plan audit, and the task of gathering the requested documentation, can be daunting. However, when there is an internal audit team in place, the plan sponsor has a resource that has ongoing responsibility for monitoring the plan and maintaining records of plan events, updates, and compliance. With an internal audit team, preparing for outside scrutiny of the plan becomes routine, rather than ruinous.