Under the Employee Retirement Income Security Act (ERISA), employee benefit plans with 100 or more participants are required to file a financial audit as part their yearly Form 5500 series filing. Doing so demands hiring an independent auditor.
A financial audit is an accountability tool that ensures a company or entity’s financial statement is accurate. Aside from helping improve plan management, streamlining plan operations and identifying errors, an audit ensures the plan administrator is carrying out its fiduciary responsibility in completing a Form 5500, says Ian MacKay, director of the AICPA Employee Benefit Plan Audit Quality Center.
The AICPA, or the American Institute of Certified Public Accountants, recently pushed a report emphasizing the importance of a quality plan auditor. In the report, the AICPA breaks down why specific processes, such as a request for proposals (RFPs), are imperative for some plans. While an RFP is not required, some administrators may consider it appropriate to ensure an auditor’s credibility.
MacKay explains that neither ERISA nor the Department of Labor (DOL) require plan sponsors to issue an RFP. “It’s more of the plan fiduciaries and what the plan sponsors think is appropriate,” he says. “A lot may depend on changes of the audit firm or changes in the plan itself.”
Barry Klein, a partner with Carr, Riggs & Ingram LLC, says that while there is no requirement when it comes to the RFP process, plan administrators need to understand their fiduciary duties under ERISA to remain in compliance. Ensuring the plan is properly audited is a part of an administrator’s fiduciary responsibility. If they fail to do so, the administrator risks penalties and potential fiduciary threats. “You want a quality plan auditor because you have a fiduciary responsibility to submit the plan as properly audited,” he says.
If a plan is implementing an RFP, MacKay urges administrators to ensure it includes specific plan details. This will help auditors have a better understanding of the plan they would potentially work with, including the type of plan, plan year end, size and name of any professionals, including custodians, recordkeepers, investment managers and third-party administrators (TPAs).
“Plans will vary from one to the other,” MacKay says. “It’s better to describe as much as you know about the plan, such as the administrator or any other unique things about the plan, so that when the audit firm responds, it has a better sense of the environment and the situation so it can put together a more appropriate proposal.”
When preparing the RFP, the AICPA recommends administrators clearly communicate facts and conditions surrounding the engagement, state objectives and requirements, and include the information needed to properly evaluate the proposal. The AICPA also recommends administrators require the proposals to be presented in a common format to allow for efficient evaluation and comparison.
If the DOL finds that the Form 5500 is professionally substandard and rejects the filing, the plan will accrue penalties until the administrator fixes the noted issue and goes through another audit, Klein says. “It’s a situation you don’t really want to be in as a plan sponsor or fiduciary,” he adds.
With that in mind, some plan sponsors determine it’s crucial that they work with a reliable auditor. The AICPA report lists several key qualifications to look out for when selecting an auditor, including experience, professional development, independence and licensing.
MacKay recommends administrators look for an auditor that has a good understanding of ERISA and DOL regulations, along with unique auditing reporting. “They want to make sure the audit firm knows the auditing process well and has experience,” he says. “If they had experience with the audit firm before, how was the quality of service? Did it meet the expectations of the plan sponsor and administrator?”
It’s also important to determine the terms of the engagement, including the length of time the contract will cover. Depending on the contract, administrators may need to enact RFPs every three to five years, MacKay notes. “Different plan sponsors will have different policies for RFPs, whether it’s every three or five years,” he says.
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