How Can We Avoid Management Letter Comments on Our Employee Benefit Plan Audit?

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When assessing possible threats to an employee benefit plan, it’s important to determine which parties have an interest in your retirement plan. These parties typically include regulators, plan participants and plan sponsors.

When evaluating the interest of regulators, plan participants and plan sponsors, you’ll most likely find they have one common factor: They expect participants to receive every penny (and we do mean penny) they have coming to them. While this expectation relates to every component of a participant’s balance, it’s primarily focused on participant and plan sponsor contributions and the accumulation of investment earnings. If a plan sponsor’s payroll system is excluding legitimate elements of eligible compensation, then a participant’s contribution will be less than what it should be. If a plan hasn’t earned enough investment income due to unreasonable management fees paid to brokers or has underperforming investments, then that would negatively affect a participant’s balance as well.

Here are the top five issues to monitor to keep you out of hot water with audit committees, regulators and plan participants:

  1. Ensure timely remittance of participant contributions and loan repayments.

This item is at the top of the Department of Labor’s (DOL) checklist for typically every 401(k) audit they perform. While many plan sponsors believe they have plenty of time to remit these payments to the plan trustee, the DOL usually expects these to be remitted within three to four days of your payroll date. Moreover, once you demonstrate you can remit the contributions in one day, the DOL will expect all of your contributions to be remitted within one day of payroll.

Management letter insight – Develop a policy defining what’s considered late to avoid confusion down the road.

  1. Use the correct compensation when calculating participant and employer contributions.

One of the most common errors discovered in an employee benefit plan audit is when eligible compensation, as defined in the plan document, isn’t consistent with how the plan is operated. This especially becomes an issue when the excluded compensation is a significant item, like bonus compensation. On occasion, the explanation provided to the auditor has been “We know employees don’t want 401(k) contributions coming out of their bonus money.” While this could be true—who doesn’t want all of their bonus money—the problem is your plan document doesn’t exclude bonuses from the definition of plan compensation. When you add up the employee deferral, associated employer match and investment earnings the employee would’ve earned (especially if you have to go back several years and fix this operational plan issue), the amount becomes substantial.

Management letter insight – Have a member of payroll evaluate all payroll codes to determine if they’re eligible compensation as defined by the plan document, and establish a process to update this any time new codes are added.

  1. Review the System and Organization Controls (SOC) 1 report of the plan’s third-party administrator.

The vast majority of retirement plans outsource their operations to a third-party administrator (TPA) that specializes in investing plan funds and preparing participant statements. Given the significance of these operations to the plan as a whole, plan management should obtain the SOC 1 report for the TPA and any other entity holding or processing transactions on behalf of the trustee or custodian. Plan management should review the key components of the SOC 1 report in addition to the user controls that should be implemented by the plan sponsor.

Management letter insight – While somewhat dated, guidance from the American Institute of CPAs has indicated the lack of review of a SOC 1 report by a plan generally would be considered either a material weakness or a significant deficiency—and we know how much audit committees like those types of deficiencies.

  1. Have regularly scheduled administrative committee meetings and keep minutes.

The plan should have an administrative committee that has oversight responsibility over the plan. This committee should meet on a semiannual basis, at a minimum, and address issues such as defining the discretionary contribution, reviewing plan investment returns and evaluating plan provider performance. If the DOL selects the plan for an audit, being able to provide well-documented minutes of administrative committee meetings sends an important message to the DOL that the plan takes its fiduciary responsibility seriously.

Management letter insight – If a plan has implemented an investment policy statement (IPS), then the administrative committee should evaluate whether the plan is complying with the terms of the IPS on an annual basis.

  1. Perform interim review of plan activity.

Given the majority of plan activity is outsourced, plan management may not be as focused on monitoring the plan’s interim activity as it should be. At a minimum, plan interim activity should be reviewed on a quarterly basis, primarily focusing on contributions, benefits paid, investment income and administrative expenses. An area that’s frequently missed is benefit payments, as these calculations generally are performed by the TPA. However, errors in benefit payments, such as miscalculated vesting provisions, wrong payees and payments not consistent with participant elections, occur more frequently than many realize.

Management letter insight – Many plans don’t recalculate the vesting provisions on a sample basis but instead rely solely on the TPA’s calculations. The DOL in particular has an expectation that plan management will review interim activity on a regular basis.

By focusing on these key areas of concern in employee benefit plan audits, plan sponsors may avoid many common issues that plague retirement plans. If you have any questions regarding management letter comments specific to employee benefit plans, contact Dave or your trusted BKD advisor.


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