Be Prepared for an Audit (Even if you Don't Want One)
Rumors continue to swirl that the DOL is increasing its audits of 401(k) plans. In previous posts, I talked about the DOL audit program and the audit letters sent to plan sponsors. However, a diligent plan sponsor would want to be prepared for an audit, even while hoping it never comes. Plus, preparing for a possible audit provides the opportunity to self-police your 401(k) plan to see if there are any "action items" that need to be addressed.
A DOL 401(k) audit can be triggered by an employee complaint or even information you have submitted in your retirement plan’s annual Form 5500 filing. Of course, it can be totally random as well. So what should you have available for inspection if the audit requests comes along? Here is a list of the most common documentation requests from the DOL:
- The Plan document and all plan amendments
- Summary plan description
- An Investment policy statement
- A copy of the most recent IRS determination letter
- Copies of Forms 5500
- All plan notices. communications and meeting minutes
- Investment analysis and reports
- Discrimination testing results
- Account statements for participants and beneficiaries and Contribution reports
- Loan applications and repayment schedules
Opinions may vary about how much documentation to keep, but the general rule is that you should retain at least 6 years worth of information. I recommend keeping it for as long as you can and with the constant improvement of electronic storage mechanisms, I believe best practices can dictate scanning and retaining plan information for even longer periods. Better to have the information somewhere than to try to explain its destruction later, particular plan documents, summary plan descriptions and regulatory filings.
One of the most common errors identified by the DOL is a failure by the sponsor to have actual signed documents. Also, it is common for plans to have an incomplete record of amendments. Investment policy statements are also a big red flag, so not having one can certainly have a negative impact on the audit process. I have also discovered that plan's with lax loan documentation procedures and repayment schedules can have a more difficult time completing the audit process.
So while we all hope we are not audited, the best practices are to be prepared that one might occur. Look over your documentation and practices now and make sure you have everything in place just in case. And if you have concerns about what you have (or don't have), contact your benefit professionals to get it cleaned up.
