First, select an auditor.    Reach out to your fellow ALA chapter members for recommendations.  Interview at least three firms.  Make sure you meet with the people who actually will conduct the audit.  You need to feel comfortable with them.  You’ll be spending a lot of time with them.  Check their references to make sure they have conducted 401(k) audits for plans of your firm's size and are familiar with all the requirements of an audit.  Be prepared for the cost.  The first year audit will be more expensive because the auditors will need to look at two years' worth of data.  A first year audit will cost probably between $10,000 and $15,000, depending on the number of participants in the plan.  Subsequent audits should be about $2,000 lower if performed by the same firm since they will only be looking at one year of data. 

Develop an understanding of the scope of the audit and what the auditors will be doing.  The auditors will do more than just look at the financial statements of your plan, reconcile them to your records and make sure that generally accepted accounting principles are followed.    They also will review all of your plan documents, procedures, and internal controls in order to assess the risks of material misstatement of the financial statements.  They will look at the timing of your deposits, make sure the plan procedures regarding loans and other distributions are being followed and that vesting rules are being applied correctly. 

Be sure to get your files in order.  The auditors will give you a list of randomly selected plan participants whose files they will review.  They will want to see the initial enrollment forms and all participant-requested changes since the employees enrolled in the plan.  They also will need the payroll files for these participants in order to verify that the correct deferral amounts were made.  They will compare the employment dates listed in the payroll files and 401(k) plan files.  If the dates don’t match, the auditors will ask for more documentation to correct the discrepancy and determine the correct date. 

In addition to your participant files, you will need to have your plan documents in order and available for the auditors to review.  These will include the minutes of your Trustee meetings, correspondence with your Third Party Administrator and any correspondence with your firm’s ERISA attorney.  Remember to print out your emails as well and have them in your files. 

One area that the auditors particularly will be looking at is the timing of employee deposits into the plan.  DOL regulations require that employee contributions be deposited to the plan as of the earliest date on which such contributions reasonably could be segregated from the employer’s general assets, but in no event later than the 15^th business day of the month following the month in which contributions are withheld from wages.  In February 2008, due to confusion over what the rule really meant, the DOL announced a safe harbor rule for small plans (those with fewer than 100 participants) that said they would be in compliance if deposits were made within seven business days.  However, this doesn’t mean that you actually have seven days to make your deposits.  In fact, the DOL has been looking instead at the earliest date you can make your contribution.  For instance, if you usually make your deposit within three days of your payroll, but, due to vacations or illness, the deposit is not made until the seventh day in one pay period, the DOL will consider that one deposit late and assess a penalty for making a late deposit.   To further complicate the issue, the DOL looks at the date the funds were actually deposited into the plan, not the date the check was mailed.  For these reasons, you may want to consider sending your deposits electronically and uploading your contribution report to your fund administrator.  If the DOL does determine that deposits were not made timely, the employer will need to reimburse participants for lost earnings due to the late deposit. 

Your role as a plan administrator brings fiduciary responsibilities.  Therefore, you should look at the audit as a learning experience.  For many, the growth of the firm's plan has been a gradual increase and you may be doing things the way you did when the plan was half the size it is now.  The audit will provide an opportunity for you to closely examine your procedures and make changes in your operations that will work better for a large plan. 

Diana Stangl, Firm Administrator, Walsh, Anderson, Brown, Gallegos & Green, P.C.