Cohen & Buckmann, P.C.
Cohen & Buckmann, P.C.



It's Audit Time--Do You Know What Your Recordkeeper is Doing?

It's Audit Time--Do You Know What Your Recordkeeper is Doing?

By Carol Buckmann

Is your recordkeeper the plan administrator? All too many 401(k) and pension plan sponsors and committee members still mistakenly believe that their recordkeeper is responsible for all plan compliance.  They take a “hands off” approach and simply sign or distribute documents that come from the recordkeeper without review.

I may get a call after they get an audit notice from the IRS or DOL, or after their CPA doing the annual ERISA plan audit identifies a problem, but that is too late to save them time, money, and frustration. I then have to give them the bad news that their services agreement makes them responsible for plan administration even though they are not actually taking care of most compliance matters themselves. This means that they are also responsible for any correction costs and penalties.

Many vendors contribute to this misconception by never explaining all of those exculpatory provisions in their services agreements, but plan sponsors and committee members should be more alert to this issue as well. How many even know what their agreement provides about the responsibilities of the parties?    

Every plan fiduciary should be familiar with what the plan’s recordkeeper is doing, and every recordkeeper needs to be familiar with the provisions of the plan, which must be followed at all times.  Disconnects between practices and the plan document can even result in the plan’s loss of tax qualification, though that doesn’t happen often.  More typically, an expensive settlement with the IRS may be required to keep the plan’s tax benefits.

Some new practices can help insure that the plan is run correctly and avoid potentially expensive penalties.  Here are some steps to include in an action plan for coordinating with your recordkeeper—

·       Develop a procedures manual with your recordkeeper and in consultation with your ERISA counsel to make sure that plan terms are being followed.  For example, one of the most common problems IRS auditors see is a failure to use the correct definition of compensation in calculating plan contributions and benefits. The manual should clearly specify which items of compensation are and are not being counted under the plan.  You will also want to cover issues such as withdrawal and loan procedures and how vesting service is calculated in the manual. This is particularly important if you have an individually-designed plan, but pre-approved (prototype and volume submitter) plans need manuals, too.

·       Alternatively, or in addition, develop a controls policy for promptly identifying and correcting mistakes.

·       Review a printout at year end to check that annual IRS dollar limits have not been exceeded.  Be particularly careful if employees have transferred from one related company to another to make sure that all of their compensation and contributions have been counted.

·       Ask the recordkeeper to notify you right away if checks or notices are returned as undeliverable, so that you can make an effort to find these missing participants, which is a fiduciary obligation. Notify the recordkeeper right away when participants terminate employment.

·       Do regular self-audits so that you can identify and correct problems before the auditors find them.  This will enable you to use voluntary corrections procedures to correct any identified problems.  Make sure that a party unrelated to the recordkeeper is doing the self audit, as the whole point is to have a fresh eye evaluating what has been done.

·       Make sure the recordkeeper gets correct data for non-discrimination testing.  Ask questions if you don’t understand what information is being requested because mistakes can lead to false pass results requiring expensive corrections.

·       Review your draft Form 5500 carefully to make sure the answers are correct. Answers on this form can lead to IRS or DOL audits. Make sure that any mistakes you identify are corrected and that the form is filed on time.

·       Review your recordkeeper’s cybersecurity procedures and insurance to make sure that participant data is properly protected. You may be responsible for benefits paid out due to fraud.

Implementing these recommendations will take time, but it will be time well spent.  Your ERISA counsel can be a valuable resource in this process.