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It’s Audit Season for DC Plans – Choose Wisely

Fred BarsteinFred’s Take: With audit season upon us, we decided to republish an article on selecting your 401k plan’s auditor. Many companies mistakenly think that all CPAs have the experience and knowledge to conduct an ERISA audit required for plans with 100 or more participants, which really means 100 or more employees eligible to participate. Think again. According to the DOL’s Chief Accountant, the agency is focusing on the quality of the plan’s auditor. Though most essential functions in running a defined contribution like record keeping, compliance, investment selection and employee education can be outsourced, plan sponsors must conduct a thorough and prudent due diligence process in selecting and monitoring third parties. In the article republished below by the experts at Fiduciary Plan Governance which we ran earlier this year, the outline of a prudent process is reviewed.

Evaluating responses to your plan auditor request for proposals can be done simply and efficiently if you lay out the criteria you consider most critical in advance and assign a weight in terms of importance to each. This approach creates a framework of objectivity before you begin reviewing the proposals.

Each evaluator should assign their own weighting to each criterion rather than for the group to come up with a common weighting. We have found that this allows each evaluator’s perspective to be aired during discussions with the candidates and the evaluation team.

For example, if working directly with a partner with extensive EBP audit experience is highly valuable from one evaluator’s perspective they might give that criterion a weight of 3 on a weighting scale of 0 (no importance) to 3 (extremely Important). For another, it may be fine to have an associate or staff person conducting the actual onsite work, perhaps because the hourly cost is much lower, so they might weight the same criterion 1 (somewhat important) or 2 (important). In our experience, it’s critical to a successful process for those differences in view to be identified and considered, especially as elimination or selection of candidates for interview is determined. 

We suggest you also determine if there are any “non-starters” in the criteria that would eliminate a candidate regardless of how it responds in other areas. For example, some obvious “non-starters” might be:

  • Not being licensed in the state in which your organization is domiciled for tax reporting purposes
  • Having a history of DOL audit quality findings or referrals
  • Having had ethics or other negative referrals by a State CPA Society or AICPA
  • A history of or current litigation, esp. in the EBP audit area

Less obvious “non-starters” could be:

  • Not being a member of AICPA’s Employee Benefit Plan Audit Quality Center
  • A very short history or EBP audits by either the firm or the partner-in-charge of this area of the practice
  • Inability to demonstrate significant EBP audit specific training for partners and staff

 You will also need to determine the scale you will use for scoring. We have developed a system that uses either a five or ten point scoring scale for 12-15 criteria that works very well with the wide range of plan sponsors we work with. The point is to create, execute and document a thorough process for evaluating and screening candidates so that you can legitimately narrow the field with whom you will meet and from whom you will select your auditor.

Copyright 2016 Fiduciary Plan Governance. All rights reserved.

Fred Barstein

Fred Barstein

Founder & Editor-in-Chief at 401kTV | TRAU | TPSU
Fred Barstein is the Founder & Editor-in-Chief of 401kTV. Fred is also the Founder and CEO of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson School of Management Executive Education and The Plan Sponsor University (TPSU).Mr. Barstein was also Founder and Editor-in-Chief of NAPA Net.
Fred Barstein

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