Retirement Plan Audits with Auditor Mark Blackburn

On a recent LinkedIn Live I had the chance to chat with Mark Blackburn of LBMC about a “fun” topic - retirement plan audits! (And the audience groans!) Here are some highlights from our discussion on this necessary evil.

Level Set: Who Needs a Retirement Plan Audit?

The general rule is that businesses sponsoring a plan with 100 or more eligible participants need a retirement plan audit attached to their Form 5500 filing. However, the initial audit will occur only when a business has 120 or more participants. This basically keeps companies from bouncing back and forth between needing and not needing an audit. One VERY important point is, who is considered a “participant” when counting? Often overlooked are two groups. Terminated employees count if they have an account balance with the plan and participants who are eligible but aren’t contributing to the plan also count. If you’re not sure if you need an audit, it’s always a good idea to talk to your document administrator or recordkeeper to see if you need to have an audit.

How Can Plan Sponsors Be Prepared and What Can They Do to Make the Audit Go Smoothly?

It all comes back to communication, says Mark. There are a lot of people involved in a retirement plan - 3rd-party administrator, recordkeeper, investment advisor, plan sponsor - and they all have a role to play in the audit. Communication among all the team members is key, and not just after you find out that an audit is required.

Another tip is to have all your documents together - fiduciary files, meeting minutes, etc. -  and make sure documents that need to be signed are indeed signed. (RP clients can just access their Fiduciary File.) LBMC uses a tool called SmartSheet to request and project manage information from the various retirement plan team members, but no matter what software your auditor uses, it’s important to know who is providing which documents. Getting your auditor access to the recordkeeper and payroll provider can also make things much easier for all involved.

What Are the Biggest Mistakes You See in Plan Audits?

According to Mark, changes to the payroll system, turnover of payroll personnel, and differences in the way compensation is defined are just some of the things that keep a retirement plan from operating as described in the plan document. It’s vital for the plan sponsor to properly maintain the data file, as well as testing and sampling throughout the year. The auditor may not catch any mistakes until well after the fact - sometimes as long as 14-15 months - and correcting errors can cost big bucks. 

Auto-enrollment and auto-escalation can also be disastrous. They’re great tools to encourage people to save and they work, but they must be set up correctly in order to work properly. Getting participants enrolled on time is a common issue. There can be a discrepancy between what the plan document will allow, what a recordkeeper can program, and what your payroll system is set up and programmed to do. Operations and dataflow are particularly key here and need to be managed from the beginning of installing auto features.

Timely remittance of employees’ monies is also an issue Mark often sees. If the payroll administrator goes on vacation, is there someone else that can handle payroll and make deposits in a timely manner? Generally, an auditor (as well as DOL) will look at the average number of days for deposits, then search for any outliers. There are reasons why payments can be late - switching to a new payroll company, for example - but late deposits without a good explanation will raise a red flag. 

Mark also audits distributions of all kinds, and cautions that if you're outsourcing that function, you need to make sure that everyone is on the same page as far as who has been terminated, etc. With Covid-related changes to retirement plan rules allowing for increased loans and pandemic-related distributions, there is an increased opportunity for people to take advantage of the system. This is where your cybersecurity best practices come into play, so that you can keep tabs on what’s going on.

Planning Ahead - Who to Hire?

How do you choose a retirement plan auditor? The DOL has a publication that can help, covering things to look for such as experience, licensing, and certification. The more complicated your plan, the more you need to hire an auditor with the right kind of experience. 

A recent DOL “audit of audits” study found that firms who do fewer than 10 plan audits each year had error rates in the 50-70% range. Expertise is key when hiring a plan auditor - after all, this is real money that belongs to real people that you’re in charge of! It’s important for you to pay for a quality audit, not just check the box to get it done. This is a service provider that you still maintain oversight over as a fiduciary.

What’s Changing About the Audit Opinion?

If you read a plan audit, you would notice that there’s an accompanying letter with a lot of boilerplate language that sounds like it’s not rendering any opinion. (My words, not Mark’s.) Much of the audit was spent on the plan sponsor’s operations and in what was known as a “limited scope audit,” the auditor got a certification from a qualified investment provider that allowed the auditor to bypass the audit testing on the investments and related income. This “limited scope audit” is going away, however, to be replaced by the “103(a)(3)(C)” audit. Instead of disclaiming an opinion, in a 103(a)(3)(C) audit an auditor must provide an opinion on audit areas that are not certified and perform limited procedures on investments. Read more here. This changes both the form and content of the related auditor’s report.

These rules will be in effect for the majority of plans starting in 2022 (for the 2021 plan year). Under the new rules plan sponsors have new responsibilities. You, with the help of your plan vendors, will need to determine whether a 103(a)(3)(C) audit is permissible and whether the certification meets ERISA requirements as well as understanding which investments and disclosures are certified, and you will need to acknowledge that all the conditions are met.

Also, when preparing Form 5500, it used to be that auditors could just get a Schedule H and tie their financial statements to that; now they must look at the entire form. This could bring up a lot of questions, says Mark, since some of the 5500 reporting rules differ from the financial statement reporting rules. All in all this could affect how long the audit will take. The takeaway here? Start early! And to reiterate what we said earlier: Communication among retirement plan team members is key to making sure your audit goes smoothly.

You can reach Mark at mblackburn@lbmc.com if you’re on the hunt for a retirement plan auditor. 

And if you’re looking for a plan advisor who knows how to partner well with auditors, reach out to us at hello@retirementplanology.com!