Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
It’s that time of year where 401k plans need to be audited if they have more than 100 participants/employees. If you are such a company, you probably have someone in HR or Finance working with your plan’s recordkeeper or custodian to assist the auditor in performance of its duties. Maybe you even think that because your plan is audited that everything with the plan, including expenses, must be ok. After all, it’s being audited.
Well, you are probably incorrect. As a CPA, I wanted to write to clarify a few items around the annual Retirement Plan Audit as many people believe it does things it doesn’t do. This whole topic is top of mind at the moment because I am working with a prospect who has its plan audited. When we discussed the fees, the CFO actually referenced the audit indicating that the auditor documented $610 in fees for the plan. It was right there on the audit report. This is for a plan with over 130 employees. Sound too good to be true? It is.
Upon further digging, we found the advisor was being paid over $20,000. The recordkeeper, an insurance company, was receiving over $35,000, and yet the auditor signed off on the fees as being $610. How in the world can there be this much of a disconnect?
It’s important to understand what the audit is intended to do. According to the American Institute of Certified Public Accountants (“AICPA”) the purpose of the audit is to gain assurance that the financial statements as a whole are free from material misrepresentations. Moreover, in a Limited Scope Audit, which is almost all audits, the auditor does not audit certified investment information from an insurance company, bank, or trust company. It is in this area where the disconnect exists.
In my example above, the insurance company certified that only $610 were actual administrative expenses charged to the plan despite the fact that the plan had paid over $55,000 in additional fees! However, because the insurance company certified $610, the auditor put down $610 on the audit report and my CFO thought those were the expenses. Apparently, the auditor did not consider the extra $55,000 material to the financial statements and/or simply relied on the insurance company’s representation that $610 is all they needed to be concerned about.
Regardless of what the auditor was thinking, the above result is not good! $55,000 in fees IS MATERIAL. It may not be material to the financial statements themselves, but it is material to the employees in the plan who are saving for retirement. I’m not going to say if such a fee is prima facia excessive, that all depends upon what the employer is getting for those fees. What I am saying is that everyone should at least know what those fees are for so the right questions can be asked.
If you are an employer subject to a 401k plan audit, you may have a great auditor. However, a good auditor alone is not sufficient to provide assurance that your fees are reasonable and that you are getting appropriate services. For those answers, you need to speak with a retirement plan expert, like me.
Please give me a call. I would love to visit with you.
Pete Welsh a/k/a 401Guy
The qualified plan world is tricky, and if you are a regular reader of my blog, you undoubtedly already know this. After 25 years working with retirement plans, I like to think that I have seen many if not most of the problems, and I have. However, sometimes I forget about a problem for a long time until it resurfaces. I am working on one such problem now.
In the tax exempt (or 403(b)) retirement world, it is not uncommon for employees to have individual contracts with companies such as TIAA, AIG, Lincoln, or other providers of tax-sheltered accounts. However, what has happened over the last many years is the organizations that sponsor these plans have begun to move toward what I’ll call “single contracts” for their retirement plans. Rather than have each employee maintain their own retirement contract, the employer holds all the retirement assets in a single contract for the benefit of the employees. This is how the 401k world works.
The problem on which I am currently working involves an organization that moved from these individual accounts to a single contract. What is interesting is that when they moved they did not, and could not, require all the individuals to move their money into the single contract. Some employees did, but many did not. When the new provider began recordkeeping the plan, they did not account for several employees who had these individual contracts as they could not track them on their recordkeeping system.
So, what’s the big deal? Where is the problem? In this case, the employer moved to the new provider when they had less than 100 employees. Over time the firm grew, but not to the point where they needed an audit, or so they thought, and I know you know what’s coming next….
When you add in the individuals who were not being tracked because they had individual accounts, the plan did, in fact, become subject to the Form 5500 audit requirement. An honest mistake, you might say. No big deal. An honest foul. We’ll fix it going forward
Ya, well, the DOL doesn’t quite see it that way. The penalty is $150 per day up to $50,000 for each Form 5500 when the auditor’s report is deficient. Suffice to say that if the audit isn’t even done, it’s deficient.
What are we doing now? Well, I am working on becoming the advisor on the plan because the current advisor didn’t even know about this. I am also working with the attorney who has been hired to engage the DOL and IRS to seek to mitigate penalties. We will soon be working with the plan’s recordkeeper to amend returns, and we are obviously reaching out to a CPA firm. This is a huge mess for the employer, who quite honestly is just trying to execute on its tax-exempt mission and doesn’t really have money to fix this.
Concerned that maybe your advisor doesn’t fully understand the myriad of rules that apply to your plan? Give me a call and let’s have a conversation. Problems have a way of sneaking up on you!
Pete Welsh a/k/a 401kGuy