Does your 401(k) plan pay higher than average fees? Do you have more than one qualified plan?
A number of recent reports indicate why you may receive special scrutiny if your plan is selected for audit or investigation. Statements by officials at the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) also provide guidance about how to survive the audit process without being subjected to penalties or enforcement action. Here is some information about new projects and what the auditors will be looking at, and some advice how to prepare.
The 401(k) Questionnaire Project
In 2010, I wrote about an IRS 401(k) questionnaire that had been mailed to certain 401(k) sponsors. The IRS has released its report of the results, and the most common errors it found. Here is a link to an IRS summary of results.
The IRS will be targeting the most common problems it identified through the questionnaire when it does an audit. These included small sponsors with multiple plans, failure to make top heavy minimum contributions, and late corrective distributions when 401(k) plans fail non-discrimination testing. The IRS also confirmed that it selected for audit any plan sponsor that did not return the questionnaire.
IRS Examination of Internal Controls
The IRS has stated that the first thing its auditors look at is whether a plan has appropriate controls; that is, whether there are documented procedures and practices to prevent or quickly flag errors. If a plan has appropriate controls, the audit may not proceed further.
DOL Fee Review
The Philadelphia office of the DOL has just announced that it will be opening investigations involving 401(k) plans where participants appear to be paying high fees based on the DOL’s own plan data files, and we expect that other DOL offices may be following suit.
Plan sponsors should expect that the DOL will be asking to see service provider fee disclosures that were required by last July 1, and looking carefully at what fiduciaries did with them. Plan fiduciaries who have reviewed their service provider disclosures and benchmarked and reviewed their fees through an entity independent of their vendors will be in the best position to defend themselves if their plan fees are claimed to be too high.
ERISA has never required hiring the least expensive provider; factors such as superior service and plan complexity are appropriately also taken into account. But the plan fiduciary who can’t answer the DOL’s questions about fees is not going to be in a good position.
How else can plan sponsors and fiduciaries protect themselves? Here are some tips:
You and your advisers should review your 5500’s carefully. Now that we have electronic filing, incomplete filings are caught quickly and answers tending to show violations, such as a “no” to whether the plan has required bonding coverage, may trigger follow-up questions. In some cases, the way 5500’s are filed could even trigger an audit. Never file a 5500 sent from your vendor without checking it carefully.
Do your own self-audits periodically to identify problems that may be eligible for the many correction programs if caught before actual audit. Watch for a 401(k) questionnaire self-audit tool being developed by the IRS for release later this year.
The IRS suggests using the questionnaire results to strengthen existing internal controls, which will avoid violations in the first place. And don’t forget that you will also need good records to document your controls.