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
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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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