Defined Contribution Audit Guidelines

Wednesday, May 19, 2010

The Employee Retirement Income Security Act of 1974 (ERISA) provides for Plan annual reporting and disclosure provisions under Title I of the Act. This is the requirement that retirement Plans with 100 or more participants, which hold assets in trust for participants are required to obtain an annual financial audit by an independent qualified public accountant (IQPA). An independent qualified public accountant is generally meant to be a Certified Public Accountant (CPA) who has no stake on interest with the Plan Sponsor other than performing the required annual audit.  Plan Sponsors should always engage professional, certificated, licensed legal and financial advice in dealing with employee benefit plan issues.

The purpose of the audit is to ascertain that the Plan Sponsor is operating the Plan according to all applicable laws, the Plan documents, in a prudent manner, and with the benefit of the participants in mind. To test this provision the auditor will conduct the audit using auditing standards (GAAP) that are generally accepted in the US and request to see a number Plan documents, examine various financial transactions, contact selected Plan Sponsor employees and participants, and contact investment, record keeping, and fund managers.

A typical audit will examine:

Plan Documents

Plan master document

Proto-type documents

IRS Letter(s) of Determination

Summaries Plan Document, Annual Report, and Materials Modification

SAS 70

Current draft and prior IRS 5500’s, related schedules, and prior auditor reports

Audit package from investment, record keeping, and fund managers

Participant’s periodic statements

Correspondence

Any correspondence between IRS, DOL or other applicable governmental agency and the Plan Sponsor relative to the Plan

Any correspondence between Plan Sponsor and attorneys concerning the Plan.

Plan Forms

Enrollment, fund allocation, transfer, rollover, distribution, loan, or other applicable forms completed by the Plan participants.

Contribution Transfers

Financial proof of employee contributions deducted from participants earnings.

Financial proof of employer matching contributions for participants.

Transfer and deposit of employee contributions and matching contributions to the official investment manager.

Documentation on Plan mergers, acquisitions, and divestitures.

Process Reviews

Plan Sponsor internal processes and controls for determining, initial and on-going eligibility, vesting, claims processing, inbound/outbound rollovers, appeals, loan approval, QDOR’s, partial, hardship, and final distribution.

Plan Sponsor internal processes and controls for enrollment, dis-enrollment, indicative and demographic changes, initial and on-going fund allocations, default processes.

Plan Sponsor internal processes and controls for fund transfers, participant reporting, and access to accounts, authorizations for Plan and participants changes.

Census Data

A data file containing employee indicative, demographic, plan participation information for the Plan Sponsor’s employees.

Auditor Plan Sponsor Communications

Prior to an audit, the auditor selected by the Plan Sponsor will contact the Plan Sponsor. Depending on how the Plan Sponsor-Auditor relationship is managed, the initial and on-going contact may be through the Plan Sponsor’s Chief Financial Officer, Chief Legal Officer, Chief Human Resources Officer or other designated key management person. As part of this communications management process, the Plan Sponsor and auditor should execute an engagement letter (required by SAS 108), representation letter, and an understanding of internal communication’s control. At this initial contact, a preliminary date is set for the on-site visits of the auditor. Included in the initial contact communications is a list of audit items requested. Some auditors will want the employee census file prior to the initial on site visit; remember any transmission of employee census data must be conducted in a highly secure manner.

Once the auditor has the employee census data, the auditor will select a limited number of “test” cases to sample, usually 5-10 per test category. These categories include both positive and negative (as applicable) outcomes for eligibility determination, enrollment, participation, investment allocations, vesting/service credit accrual, loans, verification of beginning/ending account balances, and distributions. The auditor will want to examine copies of documents confirming age, dates of hire, termination, enrollment, allocation changes, loans, distributions, and other events significant to the Plan and participant actions. The auditor will use this information to contact, usually through the Plan Sponsor, the sampled participants and seek verification as whether or not these were participant directed initiatives and/or the information is correct.

Most auditors are very professional, well educated, and trained individuals. However, all communications between the auditor and Plan Sponsor should be conducted with the highest degree of professionalism on both sides and well documented. While the Plan Sponsor employs the auditor, they are “independent” and is there for the benefit of the plan participants not the Plan Sponsor. Since the Plan Sponsor retains many auditors for several years, it pays to maintain a good working relationship to ensure a smooth audit in future years.

Once the audit is complete, the auditor renders their “opinion”, either the plan meets the audit standards and thus received an unqualified or not. It is rare, but possible that the Plan could fail an audit, if this is the case, the Plan must correct the deficiencies immediately, and the auditor should identify the deficiencies and provide “limited” guidance on corrective measures to be taken. Provided the Plan Sponsor, fund manager, investment manager, record keeper or other party in interest makes the necessary corrections, the auditor may be able to deliver an unqualified audit.