IT MIGHT SEEM LIKE MORE plan sponsors than usual would file
for an extension of Form 5500 filing this year because of the extra work put on
them by the effects of the COVID-19 pandemic.
But Bradley J. Bartells, certified public account (CPA) and
a partner at MUN CPAs in Sacramento, California, whose firm performs “about 50
large plan audits,” says he’s seen the same number of extensions as in prior
years. He notes that some plan sponsors that file for an extension just like to
do their filing later, and others do so because it takes them longer to get all
their information together.
Jennifer Moore, director of 401(k) audit services at PriceKubecka,
says recordkeepers normally file extensions automatically. The majority of her
firm’s clients extend their filing.
Moore says it’s been an interesting year with the COVID-19
pandemic. Even this late, her firm is getting many calls from plan sponsors
trying to find auditors. “Businesses have been closed for so long, they are
trying to get back into the swing of things,” she says. “I think the DOL
[Department of Labor] will see a lot of filings coming at the deadline.”
With the extension deadline coming up on October 15,
Bartells and Moore shared their concerns and suggestions for plan sponsor
processes.
Although it’s called a financial audit, auditors examine
many things in retirement plans. Bartells says auditors get items they need
from payroll providers, plan custodians and third-party administrators (TPAs)
or recordkeepers. However, from plan sponsors, auditors need minutes from the
meetings of plan trustees or oversight committees. “A lot of plan managers
don’t keep minutes, so there’s no evidence or documentation that they are
exercising their fiduciary duties. Even some of our repeat clients are not
consistent about it,” Bartells says. “There are so many lawsuits out there
against plan sponsors about fees and investments. If they would just document
how they benchmark or how they came to decisions, they would probably save a
lot of money on defense costs.”
In a LinkedIn post, “401k plan concerns – from the auditor
perspective,” Bartells says there are still plans that haven’t even established
and formalized an oversight committee. Plans need “to have an oversight
committee which regularly meets to review plan activity and perform tasks that
will be subsequently discussed. The oversight committee for the plan should
include the named fiduciaries of the plan, as well as key members of management
who are involved in the day-to-day operations of the plan. I recommend the
oversight committee for the plan meet no less than quarterly,” he says in the
post.
As for keeping meeting minutes, Bartells’ article says,
“From an auditor perspective … if it’s not documented, then it did not happen.”
Common Issues Auditors Find
Asked about common mistakes he sees, Bartells tells
PLANSPONSOR that using the wrong definition of compensation when calculating
deferrals or employer contributions “is a big one.” According to his LinkedIn
post, “This is typically caused due to the definition of compensation in the
plan document being all-encompassing, such as ‘all W-2 wages.’ But the plan sponsor
then incorrectly excludes certain W-2 wage items, such as bonuses or vacation
payouts, from the calculation of employee deferrals or employer matching
calculations.”
Bartells recommends that plan sponsors periodically revisit
the definition of compensation in their plan document and that the definition
of compensation should be very clearly defined.
Moore says she also sees sponsors mistakenly not following
the correction definition of compensation, especially in new audits. “A
company’s payroll system gets set up first; the 401(k) plan gets set up later,”
she says. “Until the plan is set up, it hasn’t had to check whether it is
withholding money on the correct definition of compensation. Many are
mistakenly excluding bonuses.”
Bartells says continued late remittances of deferrals are
also an issue. “Most plan sponsors use a payroll provider, and contributions
and loan repayments are regularly remitted,” he says. “The most common
situation I see is in physician groups that have different pay codes for
different pay cycles. They can lose track of what should have been remitted and
send money a few weeks late. Companies with complex payroll cycles need better
processes and controls.”
Moore says the timeliness of depositing contributions is
also an issue, again, especially in new audits. The DOL provides a
seven-business-day safe harbor rule for employee contributions to plans with
fewer than 100 participants. But “large plans” that require a financial audit
to be filed with their Form 5500 are those with 100 or more participants.
“Large plans need to get contributions deposited sooner,” Moore says. “We
suggest plan sponsors take care of it when they take care of payroll tax
withholding.”
Moore says one problem her firm is seeing more of this year,
because there have been more conversions to new recordkeepers, is a lack of
documentation about loans. “Plan sponsors rely on recordkeepers to keep
documentation for loans, but when they switch service providers, they are
losing that documentation, which proves those transactions were taken care of
in accordance with participant requests,” she explains.
“Many plan sponsors don’t realize they are ultimately
responsible for providing supporting documentation,” Moore adds. “So completely
relying on recordkeepers leaves them open for issues with our audit, the DOL or
IRS.”
Moore says her biggest worry about plan management is when
sponsors blindly rely on recordkeepers. “It worries me when we’re doing initial
inquiries with plan sponsors and their answer to everything is, ‘Oh, we don’t
do that; the recordkeeper does that,’” she says. “I’d say at least 75% of the
time they say the recordkeeper is doing something, it’s not. For example, some
plan sponsors think their recordkeeper is sending eligibility notifications to
employees, but it’s not. Sometimes they don’t think they have to keep
documentation, but they should be.”
Bartells says, on a high level, what worries him about plan
sponsor processes is when employers have outsourced most duties so it almost
seems like the sponsors don’t take enough interest in or responsibility for the
plan. “When I talk to them about what’s going on with their plan during the
year, it seems like they don’t have a good feel for it,” he says. “They are
ultimately responsible, and the DOL wants them to know what is going on with
the plan. Some are completely withdrawn from plan activity.”
Suggestions for Plan Sponsor Processes
As part of plan sponsor processes, Moore says she stresses
that clients should “make sure whatever comes out of payroll is getting
deposited timely and correctly.” She recommends plan sponsors do a
reconciliation at the end of each year.
In addition, “to earn a gold star,” Moore says plan sponsors
should know the correct definition of eligible compensation for contributions.
“At year-end, make sure contributions have been allocated correctly and look at
any special pay that may have occurred—anything unique,” she says.
Other than having a retirement plan committee, Bartells
suggests plans have an investment policy statement (IPS) and follow it as part
of their processes. He says he would suggest that plan sponsors use an
independent financial adviser to give information to the committee and do an
unbiased evaluation of investments.
Bartells also says it might make sense for some plan
sponsors to do their own sampling or internal audit if they’ve had audit issues
in the past or have a complex plan or complex calculations for different
groups. Sampling is when a percentage of participant accounts is randomly
selected and checked to make sure contributions, loan repayments,
distributions, etc. are correctly calculated and posted.
In his LinkedIn post, Bartells says he is “surprised by how
many plan sponsors are unaware that SOC-1 reports exist.” He explains to
PLANSPONSOR that auditors “rely on these a great deal.” SOC stands for “System
and Organization Controls.” Bartells says if he looks at a recordkeeper’s SOC-1
report, for example, and sees it has clean controls in place, he can reduce
some of the sampling.
“We find that plan sponsors don’t look at them to make sure
service providers have effective controls in place to process transactions, so
they don’t know if there are any issues,” Bartells says.
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