Retirement Plan Financial Audit Processes Are Evolving

The main purpose of the  financial audits required of retirement plans with 100 or more employees, which sponsors must include with their Form 5500 filing, is to give the Department of Labor (DOL) insight into “the plan’s operations and whether or not the plan is operating in accordance with the plan documents,” explains James Moyna, a principal with accounting firm JMM.

“For example, the DOL wants to see how contributions are calculated, who is eligible for distributions, what vesting provides for with respect to distributions, who the plan fiduciaries are, how often they meet and whether they are keeping records of those meetings, and how they choose plan providers,” Moyna says.

New processes and systems for performing these audits can cut costs for plan sponsors, streamline the work and allow for any discrepancies to be caught earlier. Plan sponsors should evaluate the process and system their auditors use to perform the plan financial audit.

Moyna says that a best practice with respect to these audits is to begin the process as soon as the previous Form 5500 is filed. “Our firm conducts audits differently than traditional accounting firms,” he says. “A typical accounting firm starts the plan audit in the summer, typically June or July, and then files for an extension, which gives them until October 15 to complete the audit. This is the approach for 90% of plans.

“The problem with that,” Moyna continues, “is that if there are problems discovered, which happens quite a bit—in 25% of the audits we do we find something that needs to be fixed—they are left with a compressed timeframe in which to make the correction. To address that, we specialize in 401(k) Form 5500 audits exclusively and conduct them year-round. Even before the plan year ends, we begin audit testing. That helps us determine if there is anything incorrect. It is a much more efficient process.”

PriceKubecka has taken the plan audit process a step further by automating it. Founded in 1995, the firm had always conducted the audits manually, says Brian Price, managing partner. “In 2017, we began looking for a technology solution to expedite the audits,” he says. “There was nothing on the market, so we built our own software. When we were doing audits manually, they would take 100 hours each and cost between $10,000 and $12,000. The software cuts that by more than half to 40 hours at a price of $7,000. Eventually, we would like to get that down to 20 hours.”

The software culls data from the payroll and recordkeeper databases, Price explains. “The audit is all around making sure that the amounts are right in all participant accounts, down to the penny—ensuring that the plan is running correctly and that the money is being distributed correctly.”

A further benefit from automating the audit process is that, rather than conducting sample testing in the manual audits, “we are able to collect all of the data and ensure that the accounts for 100% of the population are correct, so it is a much more accurate audit,” he says.