Preventive maintenance is an essential part of any health routine—even when the patient is a retirement plan.
Periodic checkups can keep plans running smoothly and help plan sponsors identify issues early, before those become difficult and expensive to correct. Such audits come in two varieties—transactional audits and operational audits—both of which are distinct from the annual financial audit required by the Employee Retirement Income Security Act (ERISA). ERISA financial audits are performed by accounting firms to review participant-related transactions and the plan’s investments to support the plan’s annual Form 5500 filing. They are a good starting point for assessing the health of a plan, but they really only scratch the surface.
Transactional audits, by contrast, review benefit estimates, calculations and other plan transactions to ensure they conform to the provisions laid out in the plan document. The objective of a transactional audit is to improve plan accuracy and compliance. In fact, an analysis of the “big-ticket items” that the IRS focuses on in an audit situation is a good starting point for these audits. Examples of these items are loan disbursements, required minimum distributions (RMDs) and the process for finding missing participants. Alternatively, a plan sponsor may determine a set of plan provisions to be reviewed, then select a test population of participants who are affected by those specific provisions. Eligibility, pay definitions, service definitions, benefit formulas, minimum benefits and transfer rules are examples of categories used to pick test cases.
Operational audits are more comprehensive in nature and review administrative processes from start to finish to confirm they follow established operating procedures. The objective of an operational audit is to improve administrative efficiency and enhance the participant experience. Typical areas of focus include:
- Comparison of plan documents against the requirements in the documents used to program the administration system and against the actual administration system configuration;
- Review of administrative operations manuals and call center knowledge systems;
- Analysis of data ownership and data flow from payroll to administration systems;
- Review of eligibility processes and related data points, including periodic feeds of data from payroll to administration, historical stored data and dynamic age and service calculations;
- Evaluation of benefit calculations and regulatory limits;
- Analysis and sample validation of various distribution types as well as reductions, discontinuation and reassignment of payment amounts; and
- Review of administrative processes required for the financial operation of the plan(s), including check-handling, lump-sum payment protocols, periodic death searches and address change management.
If issues surface during a transactional or operational audit, a thorough and comprehensive root-cause analysis may be an appropriate next step, especially if the failure is severe. This phase requires a deep understanding of the underlying processes as well as the day-to-day activities performed not only by the plan sponsor, but also by payroll systems, carriers, trustees and recordkeepers. The findings of the root-cause analysis will help define the actions required to bring programs and processes in line with plan documents and regulatory requirements.
Given the detailed nature of the work, many plan sponsors opt to engage the services of a third-party consultant that is experienced in conducting these preventive audits. An effective auditor must have the retirement plan experience required to consider particulars such as plan provisions, population characteristics, third-party provider relationships, data quality issues and acquisition/divestiture history.
While it’s not necessary to conduct preventive audits on an annual basis, best practice dictates that they should be completed every three to five years. Issues left undiscovered for longer than that can be extremely difficult—and expensive—to correct. Moreover, periodic audits play a role in ensuring plan sponsors adapt to any changes that may have occurred within the regulatory landscape—e.g., the IRS’ new expanded Self-Correction Program—or within their own environment such as process changes following an acquisition or a change in third-party administrator (TPA).
If it’s been a while since your plan has had a thorough going-over, consider scheduling a “deep clean” as a preventive measure that will help you avoid more extensive plan repairs down the road.
Jay Schmitt, ASA [Associate of the Society of Actuaries], is a principal of Strategic Benefits Advisors, an independent, full-service employee benefits consulting firm that solves benefits issues for clients with 500 to 300,000-plus employees. He has more than 25 years’ experience in benefit plan administration and consulting. He can be reached at firstname.lastname@example.org.
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