The DoL 401(k) Audit: How to Reduce the Odds and Prepare (Just In Case)

September 15, 2017 by Healy Jones

A Department of Labor audit of your company’s 401(k) plan can be a time-consuming, not to mention, an expensive proposition. How expensive? In 2013 the DOL’s imposed fines reached an average $600,000 per plan. By 2016, the Department of Labor’s recoveries amounted to over $777 million. In addition to the risk of monetary damages, those subject to an audit can spend significant time responding to Department of Labor audit requests. While a plan sponsor with sound documentation may only receive a short visit from the DOL, it’s quite possible your company will have visitors for weeks or months and may spend an enormous amount on ERISA attorneys. Download our DoL Audit Checklist below to learn how to avoid a costly, time-consuming audit or prepare

What triggers a DOL 401(k) audit?

Certainly bad luck can leave your company’s 401(k) subject to a DoL audit. Your plan could be chosen at random for review. But the Department of Labor does not just rely on random audits alone to ensure the integrity of the nation’s defined contribution plans. The DOL is on the lookout for red flags that trigger a 401(k) audit. These red flags might be found in submitted documents like your Form 5500, or they could be uncovered as a result of a communication sent to the DOL a plan participant. The good news is that airtight documentation and diligent administration can reduce your chances of a DOL audit. The bad news is that both the IRS and the DOL have plans to increase the number and frequency of 401(k) audits.

Given the heavy reliance on “triggers” to initiate retirement plan audits, care should be taken to avoid any red flags that might concern Department of Labor investigators. But companies also must be diligent in their relations with employees. 401(k) audits are often triggered when the DOL receives a complaint from a current or former employee. For example, a misunderstanding about when an employee becomes fully vested and eligible for the full company match can leave an employee frustrated and a frustrated employee is more likely to send a complaint to the DOL to try to rectify the situation, or to “get even.” The risk of a complaint to the DOL is just one reason companies should respond quickly and professionally to any questions related to the company 401(k) – from plan eligibility to loan policies.

One way to limit the prospect of employee complaints is through effective employee communication and education. A good 401(k) advisor can help keep your employees up to speed about company matches and other plan features. And a well-designed online and mobile experience can make it easier for employees to understand how to successfully make salary deferral elections, reducing employee confusion about your company’s retirement plan.

Reducing the risk of a DOL audit by avoiding red flags

Defined contribution sponsors provide reams of information to various government agencies. Among the most critical is the IRS Form 5500. Errors on your Form 5500, such as not completing all required schedules, or simply failing to file on time, can trigger a DOL audit. Further, the DOL recently raised the fines for failing to file. Plan sponsors plans now face a daily fine of up to $2,063. That’s almost double the previous fine of up to $1,100 per day. Failing to include all the required attachments to the form is another way to grab the DOL’s attention and trigger a 401(k) audit.

If you are completing the Form 5500 in-house, consider hiring an expert to complete the Form 5500 for you. Many 401(k) providers will “prepare” your Form 5500, but take on little to no liability for making sure that it is correct. By hiring an advisor who brings administrative fiduciary coverage in the form of a 3(16) fiduciary, you can outsource the work and liability that comes with administering a 401(k) plan. Of course, the right administrative partner will also – hopefully – reduce the risk of making mistakes that could trigger a DOL audit.

Another particular area of interest is the timeliness of participant contributions. Employee deferrals should be promptly deposited into their 401(k) accounts. The DOL takes a dim view of delays in moving employer contributions from general company assets to the 401(k) plan trust. This is likely because mishandling of employee deferrals is a source of potential fraud, where a company can misuse or even steal employee compensation instead of depositing it into the employees’ retirement accounts.

Are you prepared for a DoL Audit?

Are you prepared for a DOL audit?

Depending on the reason for the audit, the DOL can request various types of information. Below is a list of some items the Department of Labor could require. If the DOL comes for a visit, would you be able to access these items for the DOL auditor?

Documents that may be required in a DOL audit

List of documents to be reviewed

Explanation

Where can I find this? Who has this?

Plan documents

Here are the documents you may be asked to provide: Basic Plan Document, Adoption Agreement and any amendments, IRS Determination Letter, Trust Agreement, Summary Plan Description (SPD), Summary Annual Report (SAR) and Summary of Material Modifications.

You should have these documents on file! They should be kept up-to-date and if needed, be signed. You might need to ask your advisor, recordkeeper and/or TPA to locate each one individually.

Form 5500s

This is a form used to satisfy annual reporting requirements under ERISA.

You can search for all your filed forms here.

Current ERISA bond

Maximum fidelity bond required is $500,000K, or 10% of plan assets, unless your plan includes company stock, in which case the maximum is $1,000,000. For example, if $400K plan, $40K fidelity bond is required. Minimum amount for a fidelity bond is $1,000K.

You should have a fidelity bond. When you filled out your Form-5500, you should have listed the amount.

Documents describing blackout periods

A blackout period happens if your plan has been transferred from one recordkeeper to another. 30 days before this happens, you should have sent a blackout notice describing the process and relevant dates for the blackout period.

You should have this on file, or you can ask your advisor/recordkeeper for a copy of the notice.

One sample quarterly individual benefit statement

Plan participants get quarterly statements breaking down their balance, performance and investment choices. Provide a sample.

Keep in your files, or obtain from your advisor or recordkeeper.

Service Provider Agreements

Agreements with all service providers and independent fiduciaries, including all fee schedules and description of services.

Keep in your files, or obtain from your advisor or recordkeeper.

Plan investment policy

You might not have one, but if you do, you’ll be asked to share how you are picking your plan’s funds.

Keep in your files, or obtain from your advisor.

Minutes of any meetings related to the plan

This includes meetings with the Board of Trustees, Board of Directors, Investment Committee, or other affiliated companies.

Keep in your files, or obtain from your advisor.

Summaries of contribution files for every payroll

Payroll reports showing the total amount of employee contributions and loan repayments for each paycheck date.

Download from payroll site and reformat as needed. If running an internal payroll system, you might have to do some manual calculations so brush up on your excel skills.

List of all places where assets are on deposit

This includes custodians, limited partnerships, and investments where assets are held. You’ll need to include the names of all individuals who have the authority to make deposits/withdrawals, transfer plan assets or make plan distributions, make investment changes, and change the administration of the plan.

Keep in your files, or obtain from your advisor or recordkeeper.

Parties and Entities

This is defined according to ERISA Section 3(14).

Keep in your files, or obtain from your advisor or recordkeeper

Details of forfeited accounts

For example, there could be a forfeiture account because an employee took a distribution but was not fully vested. The unvested amount is forfeited, and you have to keep notes.

Keep in your files, or obtain from your advisor or recordkeeper.

Expenses (including fees and commissions)

All invoices or documents indicating which plan expenses have been paid.

Keep in your files.

Reports/correspondence from fiduciaries, consultants or investments advisors regarding the plan

Any presentations or emails from an advisor should be kept..

Keep in your files.

Details of compensation paid to the Plan, fiduciaries

These are your invoices.

Keep in your files, or obtain from your advisor or recordkeeper.

408(b)(2) disclosures

Fee Disclosures from Plan Service Providers

Keep in your files, or obtain from your advisor or recordkeeper.

404a-5 participant disclosure

Participant Fee Disclosure.

Keep in your files, or obtain from your advisor or recordkeeper.

Details of funds rolled over to an IRA or removed from the plan because the participant cannot be located

Include address, phone number and SSN for each participant you could not locate.

Keep in your files, or obtain from your advisor or recordkeeper.

Participant census

Include address, phone number and SSN for each participant you could not locate.

Actively contributing participants can typically be pulled from your payroll, while terminated participants with a balance can be downloaded from the recordkeeper.

Documentation for how employer contributions are remitted

Explain how employer contributions are remitted to plan.

Keep in your files.

Documents relating to all real property owned by the plan, loans acquired by the plan or investments made by the plan

If you have any, you would have to disclose this info.

Keep in your files.

Fund, fee and recordkeeper benchmarking reports

Keep on file the work that you or your advisor does in selecting and monitoring your retirement plan vendors, including the costs associated and how these costs compare to a reasonable benchmark.

Your advisor should have this – if not, request one from an independent advisor. (Learn about ForUsAll’s independent benchmarking here.)

Get a more comprehensive list by downloading our DoL Audit Checklist here.

One area of focus in a DOL audit can be the fees that your employees are paying to the various vendors who run your 401(k) plan. In addition to simply having access to the documents above, be sure to understand the fee arrangements with all of your plan’s vendors. If there are any revenue-sharing arrangements or 12(b)(1) fees, make sure you have documentation explaining the arrangements.

Another potential critical area for scrutiny in a Department of Labor 401(k) audit is employee education relating to the plan’s investments. It can be a great idea to make sure that employees understand their 401(k) investment options and that they have had the opportunity to learn how varying asset allocations can affect risks and returns.

Given the administrative complexity required to offer a 401(k) plan, a sponsor may run across something that should be fixed, but can’t seem to find time to address the issue. Our recommendation: find the time to address it now. If you are audited by the Department of Labor, you want to limit the errors and inconsistencies affecting your plan, and show that you had the plan’s health in mind by proactively taking action.

Need help running your 401(k)?

The ins and outs of running a 401(k) can be confusing and challenging for small business owners focused on attending to their own business. And keeping a plan compliant sometimes requires a level of investment and regulatory knowledge that is not intuitive and, frankly, is a burden to learn. But a strong advisor, with the technology know-how to administer, document and retain plan documents, can help lower the workload and liabilities of the retirement plan management.

At ForUsAll we are an independent 401(k) advisor specializing in low cost 401(k) plans for small and medium sized businesses. Our goal is to craft a low-cost retirement plan by finding you the right fund lineup and recordkeeper.

And when it comes to limiting your plan’s administrative burden, we are proud to offer full ERISA 3(16) fiduciary services to take on the work and liability for administering your company’s 401(k). With payroll integration and recurring, automatic compliance checks, ForUsAll takes on much of your plan’s daily operations, Form 5500 completion and will even have your Form 5500 signed by a 3(16) Fiduciary, so that you can lessen the administrative risks in your 401(k) and reduce the liability of offering a 401(k).

Our goal is to help you avoid a DOL audit by reducing the chance for a Form 5500 error or a complaint from an upset employee. The best way to prepare for a DOL is to be prepared. Talk to us today about how we can help automate your plan’s administration and compliance checks, or download the DoL Audit Checklist below to start assessing your plan on your own.

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Healy Jones
Healy joined ForUsAll because he believes that all Americans deserve a fulfilling retirement. As the head of marketing, he’s focused on spreading the word that small businesses can offer their employees a great 401k plan. Prior to ForUsAll, he ran the acquisition marketing team at Sunrun, the nation’s largest dedicated residential solar provider, where he lead the direct to consumer team to hundreds of percent year over year growth. He began his career in financial services, working for JP Morgan, Summit Partners, and Atlas Venture. Healy has an A.B. from Dartmouth College and an M.B.A. from Wharton. When he’s not working, Healy and his wife enjoy taking their daughter rock climbing and filling their wine fridge. When he finally retires, he hopes to start emptying the wine fridge.