What is the purpose of a 401(k) plan?

A 401(k) plan is designed to guard and protect your employees’ retirement benefits. You, as the employer/sponsor must make sure funds are available to pay the retirement and other promised benefit obligations to your employees. Choosing the right CPA to audit and monitor the plan is a good first step toward safeguarding yours and your employees’ financial future.

What can happen if the auditor doesn’t do a good job?

Your 401(k) plan auditor’s job is to test the plan’s activity and identify, excavate, and expose those potential issues. Most importantly, they need to help you correct the errors before someone else exposes them or before you, as a participant in the plan, find yourself way short of attaining your retirement goals. Unfortunately, it happens. Your employees/participants in the plan may get financially hurt after years of loyalty and service to your company.

Based on the U.S. Department of Labor (DOL), here are some examples of items you should pose to the plan auditor to prevent oversights.

  • Whether plan assets covered by the audit have been fairly reported;
  • Whether plan obligations are properly stated and described;
  • Whether contributions to the plan were properly calculated and received in a timely fashion;
  • Whether benefit payments were made in accordance with plan terms;
  • Whether employees were properly included or excluded from participation in the plan;
  • If applicable, whether participant accounts are fairly stated;
  • Whether issues were identified that may impact the plan’s tax status; and
  • Whether any transactions prohibited under ERISA were properly reported.

More questions to ask a 401(k) auditor you’re considering

How much experience do you have as a 401(k) plan auditor?

The answer to this question will give you an idea of how long the auditor has attended to this type of auditing, and whether they might have particular experience relevant to your industry, size of company, etc.

The DOL has instituted an enforcement initiative to monitor the quality of ERISA audits. Qualified CPAs (such as LSL) are firm members of the AICPA Employee Benefit Plan Audit Quality Center   and are committed to providing quality audit services to their clients. For instance, LSL voluntarily adheres to the center’s membership requirements and adds upgraded practice management disciplines such as additional training, quality control, and self-monitoring to ensure dependable 401(k) plan reviews and reporting services.

Where are you located?

Having a local 401(k) auditor means you and your auditor will be in the same time zone, and  can also do portions of the audit in person. The latter cuts out a lot of time spent on emailing encrypted and redacted documents back-and-forth.

Are 401(k) plan audits an important part of your practice?

In this question, you are looking for an experienced CPA that makes the 401(k) audit piece of their  practice a priority and has detailed processes in place to ensure that everything is done correctly. Your goal is to reduce the risk you run as the plan sponsor.

In the course of the plan audit, you will also need to provide various financial, accounting, and other plan records to the auditor for review. If a third-party service provider performs recordkeeping for the plan (for example, a contract administrator or a claims processing agent), you will have to make arrangements for those service providers to make records available to the auditor that are needed to complete the plan’s audit. Having an experienced auditor enhances the odds you will get everything you need for a clean, irreproachable  audit the first time around.

Is cost an important factor?

Several elements should be taken into consideration when a firm considers the cost of its audit:

  1.  The complexity of the plan.  Auditors have to spend more time and charge more if there are significant plan features or changes that have taken place since your last Form 5500 filing.
  2. The size of your plan. The plan size, which includes the number of all eligible participants, will have an impact on the audit fees.
  3. Your location. If you’re hiring a CPA to work on-site in your office, travel costs might be added to their fees.

Look for value, NOT cost. Remember you are also a plan participant, not just the sponsoring company. Choose the CPA firm that considers auditing a priority in their practice. 

Bottom line: You need a reliable 401(k) auditor so you can sleep at night, and there’s no “one-size-fits-all.” Ask the questions as suggested, and then decide what will work best for your company. You can also refer to the U.S. Department of Labor website, but if you still need guidance, contact LSL CPAs. Choosing a 401(k) Plan Auditor is not an easy decision, but it is an important one. Your employees will thank you and your family will, too. 

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Disclaimer: This article represents an introduction to the topic. Consult your tax advisor for a deeper understanding of this important subject.