While a plan audit – and plan auditor selection – is not generally considered a central part of the plan services on which advisors are typically focused, perhaps it should be. This week, we asked NAPA-Net readers about their experience(s) – and learned a lot!
Consider that this is not only a current subject of the ERISA Advisory Council, it’s an issue that has been studied by none other than the Labor Department – and the results? Well, they weren’t “pretty.”
Select ‘Shuns’?
As it turns out, a plurality of this week’s respondents had been “involved” with a plan audit, though only 37% directly and, at least in some cases, only from the perspective of helping round up information – with 29% indicating that they had been involved, but not directly. “We've been asked to help provide materials that the plan sponsor can't seem to locate,” explained one reader. “My team provides much of the information the auditor requests in an effort to lessen the involvement of the plan sponsor in information gathering,” commented another.
“I always assist all my clients that have an audited plan to respond to certain questions from the auditor, i.e., copies of meeting notes, etc.,” indicated another. “Only to the extent that enrollment documentation was requested or possibly information from an annual plan review,” said another, while yet another reader noted, “I have had to supply a client with email threads and some documentation, but nothing too extreme – just a confirmation more than anything of the opportunities for education meetings.”
Among those that had been more directly involved, one reader explained: “We have many plans that are audited and since we are the recordkeeper/TPA as well as advisor/manager/trustee, we are deeply involved in the audits.”
“Yes, and the auditors are either good or they’re terrible,” commented another. “There’s no in-between.” Another said, “I often recommend audit firms and usually provide much of the material for the auditors to review.”
Among the remaining one-third, 28% said they had not been involved, and the rest that they had been involved, but not in the past two years.
‘Dunn’ Involved
As for being involved in selecting that auditor, 61% had not, though the remaining 39% had. Once again, responses were mixed.
“Periodic auditor RFP is part of our core services,” noted one. Another commented: “Sometimes. When plans are new to audit I'll provide a list of auditors that I think do a good job (actually audit the plan) without being overly persnickety and at a fair price. But after that it’s up to the client to select the auditors that’s the best fit for them. Sometimes it’s someone from the list and sometimes not. And most large plans already have an auditor when they become our client.”
“Often I’m asked to make recommendations either when the plan sponsor would like to choose a new auditor, or is otherwise having to hire one for the first time,” explained a reader, while another noted that they “provided multiple choices and helped educate the plan sponsor re: audit requirements.”
Another “ran the auditor RFP for one of my clients,” while yet another commented that, “I am often asked for recommendations but not involved in selection.”
“Out of 15 audited plans, we were involved in selecting the auditor on 4 of them,” commented another reader. “Yes, frequently plan sponsors ask for my input and generally go with my recommendations.” “We usually coordinate 3-4 proposals from auditors through an informal process or through an RFP. Even if the plan committee has a preference for a particular firm we advise the plan sponsor to collect the proposals for due diligence purposes,” explained another.
“Upon request, we will provide referrals to three audit firms known to have expertise in performing plan audits.”
Although, as one explained, “I rarely get a chance to recommend an auditor.” A number indicated that they were asked to suggest possible candidates, but no further. “I have had clients ask if I know of any auditors,” noted one. “We helped the plan sponsor find alternative auditors when requested,” noted another.
“We don’t have a lot (and by that I mean none) of involvement with the audit process.”
“Sometimes, though not always, do you get requests for referrals and/or even aware the client is considering a new firm until they’ve already hired one. But, I do have a list of preferred based on industry and personal experience with them, plus whether they can do virtual audits or need to be onsite (the virtual audits are very intriguing for most clients).”
‘Call’ Signs?
We asked readers if they were not involved, who made the decision, and – not surprisingly, nearly 70% said it was the plan sponsor. “Although we conduct the due-diligence, and may make recommendations, final decision lies with the Plan Sponsor,” noted one.
Roughly 8% said they used the organization’s standard auditor – “When we’re not involved, they usually pick their accounting firm to do it” – and half that many said it was the third party administrator (TPA). The rest – perhaps because they weren’t involved – said they weren’t sure.
“If we’re not involved at the outset, the plan sponsor will loop us in,” clarified one.
“Standard is to use the company’s CPA/tax/audit firm for the retirement plan audit as well. We encourage plans to use an audit firm that specializes in plan audits,” commented one reader. “More often than not, the retirement plan auditor is the corporate financial auditor as well.”
“Generally, they have chosen their prior year’s auditor. Sometimes they will test another auditor if they come in with a really low bid.” Another said, “Sadly, if a firm is doing other work for the company, they have a huge advantage to get the audit business even if they aren’t the number one candidate.”
Another shared, “My plans are only really interested in this as the approach 100 EEs. The plans that are over 100 EEs did a quick search for an auditor a few years ago. My function was primarily giving them auditors to talk to. Price was their biggest issue but references and experience were very close seconds.”
The involvement split held consistent on involvement with a plan auditor RFP. Just over 4 in 10 (43%) had, but the majority (57%) had not.
“We’ll be assisting again. This time we'll be asking less about their background and education (because the partners that respond are never the ones coming onsite – the minions are ;-)”
“I helped my client develop the RFP looking for an auditor. Very basic,” noted one reader.
“None of my clients have wasted their time doing an RFP,” stated one. “They choose based on price of one to three choices.” “I had a client ask but they made the decision with their accountant,” commented another. “Usually clients ask us for some names and we provide options for them. I’ve yet to see a formal RFP to find one,” explained another reader.
Selection Criteria
We asked readers what criteria they thought plan sponsors looked for in an auditor for the plan statements, and they said (more than one response was allowed):
91% - Price/cost
78% - Experience
47% - References
43% - Other work they do with the organization
21% - Labor Department criteria
It came as no surprise, however that – asked to narrow that down to a primary criteria:
53% - Price/cost
23% - Experience
17% - Other work they do with the organization
5% - Labor Department criteria
2% - References
‘Guide’ Post
In case you’re wondering about the “Labor Department criteria,” we asked readers: “Did you know that the Labor Department has a guide titled, "Selecting an Auditor for Your Employee Benefit Plan”?
A clear plurality (48%) did not, and another 15% said they did remember a publication, though not that specific one. And of course, the remaining 37% did not.
“We talk about the selection process with plan sponsors and have used the DOL brochure. Oftentimes, it appears the audit firm does other work for the organization.”
“No plan sponsor that I’ve ever met has seen the booklet,” noted one. However, one reader explained, “I reference this with clients and find it very useful.” Another – “Thanks. I do now” – and still another said, “Good to know. I need to go find it.”
For the record, it’s online at https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/selecting-an-auditor-for-your-employee-benefit-plan.pdf.
Talking ‘Points’
We got a ton of responses this week (doubtless inspired not only by the topic, but the prospects of a free registration to the NAPA NQDC Conference in Chicago (details at https://napanqdcforum.org/).
We’ve already shared a number of the insightful comments we received. But we got so many good ones – here’s a (larger than normal) sampling:
Auditors and advisors should network more!
In my experience working with auditors that regularly do 401(k) and 403(b) plans is very important. They understand the DC plan and make the process much easier. I have a few plans working with the big accounting firms and each year they get the new graduates. They always put these people on the DC audit and both the plan sponsor and I end up teaching them about the plans. It’s very frustrating because these firms cost a lot more and require so much more work from everyone involved.
Auditors routinely assert that party-in-interest transactions are exempt, but they typically make no effort to actually determine if the PTE is applicable under the specific circumstances. They charge thousands of dollars to do the audit but usually provide little or no value or insight. The main reason for this is that most clients are mostly interested in minimizing the hassle and expense of this required exercise.
The problem is that plan auditors see themselves as gods and goddesses who are the only saving grace for a plan and seem to look for any opportunity to condemn other service providers and play the hero. I am seeing some ethically questionable behavior out there. What I think they need to do is consider themselves a part of a larger team, rather than adversaries of the other service providers. The current business model as it is not currently working in favor of the plan sponsor.
The importance of audits and the role advisors CAN play in them cannot be overstated.
Being involved in the auditor selection process is a great way as an advisor to bring additional value to your plan clients. It's also a great way to expand your relationships, with CPA firms, and position yourself at THE expert plan consultant.
Some auditors (and, yes, I’m including IRS auditors in this as well even though this question isn’t about them) don't really have enough experience with retirement plans to be doing the audit. For example, don't ask me for a copy of the ADP test when it’s a safe-harbor plan.
I am aware that there is a correlation between the number of audits performed and the number of deficiencies found by the DOL. I try to work with firms who conduct more than 100 audits per year.
Plan audits are not consistent across firms. Some are more detailed. Others utilize less experienced individuals supported by a manager. This can be frustrating as they often take longer and require the plan sponsor, TPA or recordkeeper to help with the education of the auditor.
Based upon the DOL study, if an auditor is not doing at least 100 audits, there is a higher risk of errors.
It continues to impress me how absolutely terrible quality these audits are. I mean, charge $10k and hand someone a garbage report? The one I reviewed this year clearly showed the auditor hadn’t read the SPD or the Adoption Agreement since 2016. Ask about amendments much? One audit didn't catch that the client hadn’t matched on bonuses in two years. Please, tell me how you test the definition of compensation and miss that. (The auditor's excuse? They only sampled 5 people’s accounts -- out of 800! That’s not even as good as the polls in the Trump election!)
It’s a huge opportunity for focused advisors to add value for our clients. Having a network of auditors, range of prices, and having done some homework ahead of time can really pay off.
We take it very seriously. If we have a problem, we want to fix it before it gets worse.
I generally refer a firm that specializes in plan audits. I have found that if a non-specialist firm is involved the audit takes longer, I have to answer many more questions, and is a frustrating experience for the client.
Most sponsors are clueless to their responsibility
Audits of 401(k) plans are $15K of wasted money. Let’s do something better with that money. Proposals to eliminate limited scope are ludicrous. I can’t think of any participant that benefited from the plan having an audit. Anyone with an elementary knowledge of bookkeeping can balance the deferrals verses the deposits. You don’t need an auditor for that.
I generally know who is required to have an audit and many of the areas that auditors look at. I’m sure there are many things that auditors look at that I’m not aware of as well.
We had a plan auditor recommend another advisor which they had spun off their firm to take over the plan. There was still some cross-ownership ties. No other advisors were recommended. They just wanted their advisory firm to come in.
I think that the process should be no different than selecting a record keeper or student loan debt vendor. Anytime plan assets are involved the plan sponsor should treat the process with fiduciary prudence.
The auditor selection process varies quite a bit based on the size of the plan sponsor. Price or cost is most important to the smaller plan sponsors required to have an audit. It is also more of an informal selection process. Large and very large plan sponsors have a more formal process and do evaluate all the traits listed in number 5 above.
Plan sponsors do like to use the prior year's auditor as they believe their familiarity with the plan will require less of their time to conduct the audit.
Audits suck :-)
Auditors have to tread lightly. If they carry too big a hammer they will not be hired again for another year.
I think these are very important as an advisor we should do all we can to support the efforts of the accounting firms that are conducting the retirement plan audits. I work with the plan sponsor, the accountant, and the recordkeeper, to try and bring information together and make sure the process moves along smoothly.
Plan audits are becoming increasingly more in-depth set forth by the AICPA standards. I do wonder why this is taking place. While I do not audit plans, it seems some standards are over the top but I’m sure there are reasons. I also don’t think plans sponsors understand how important this decision can be. Most tend to focus on cost alone or use the firm who does the corporate tax work.
I usually like to ensure that the auditing firm does plan audits as a core business and not a one-off.
Too many auditing firms use ERISA plan audits as a “filler” during slower parts of the season and assign these audits to professionals who have had no consistent training in how to perform ERISA audits. Notes to the financial statements are often lacking the detail one should expect in the report.
I would like to learn more about best practices around this topic – should we be helping our clients with the process of choosing and monitoring their auditor?
Thanks so much to everyone for your great contributions on this subject – more to come, I’m sure!
p.s. Oh, the winner of the free NAPA NQPA registration is… (drum roll)… David Barth at AXA Advisors!
