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How to Prepare for an Audit of Your 401(k) Plan

Posted in: Employee Benefits
December 6th, 2016

By Bill Sornstein

audit-stamp-croppedA recent survey of businesses with 401(k) and other qualified plans found that nearly one-third (31%) of respondents have been audited by the IRS or DOL in the past 2 years (1).  Audits are a fact of life for qualified plans.  However, there is no reason why a plan audit should be more than an occasional inconvenience.

Complying with the regulations for qualified plans is primarily about having a process in place.  This process shows how you are meeting your fiduciary obligation as an owner to act in the best interests of your employees who are eligible for your Plan.  It also shows how you are meeting the legal requirements of the Plan.  Finally, it documents the actions taken on a regular basis (at least once per year) to follow your process.

The result is called a Fiduciary File.  We recommend that this be kept electronically for easy access.  The Fiduciary File should include:

  1. Plan Documents – Include all plan documents going back to the inception date of the plan. This should also include any IRS approval letters and amendments to the Plan.
  2. Employee Notices – There are a number of participant notices that are required, including Summary Plan Descriptions, annual investment and fee notices, Safe Harbor election notices, etc. You should include copies of the participant distribution lists and method of distribution, whenever possible.
  3. Investment Policy Statement – While it is not a requirement, an Investment Policy Statement is a good tool to demonstrate that the plan is supervising, monitoring and evaluating the plan’s investment portfolio on a regular basis.
  4. Investment Reviews – The Plan should perform regular investment reviews to ensure funds are performing reasonably. You should also include copies of the annual minutes from your Investment Committee meetings.
  5. Plan Benchmarking – Benchmarking is a way to show how your plan stacks up against other plans of similar size. It compares fees, services and plan provisions to help you evaluate your plan compared to other plan sponsors.

Nothing can keep your Plan from being audited occasionally.  However, taking these steps will help to safeguard your plan and will help ensure that the plan operates in the best interests of the participants.  This will turn your audits into routine events.

  1. https://www.willistowerswatson.com/en/press/2016/07/us-employers-rank-top-retirement-plan-risks

For Plan Sponsor Use Only – Not for Use with Participants or the General Public

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.


About the Author

Bill Sornstein has over 35 years of experience as a financial advisor helping individuals and small businesses build and protect wealth for the benefit of their families, businesses, heirs and employees.  He lives in Santa Ana, CA with his wife Camillia and their dogs, Zack and Ella. His other interests include teaching Aikido and playing trumpet in a blues band. Link to full bio.

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