Audit changes spark concerns of new burdens

The ERISA Advisory Council is examining the retirement plan audit process, and some in the plan sponsor community are concerned its recommendations could lead to additional burdens and costs.

The Employee Benefits Security Administration of the Department of Labor has asked the council to explore the topic, including how plan audits could enhance the safety of plan assets, the efficiency of plan operations and plans' compliance with the Employee Retirement Income Security Act of 1974. The council heard from stakeholders at its June 25 meeting.

If the council were to recommend changes to the way sponsors must select an auditor, such as a step-by-step checklist to which they must adhere, it would be to the detriment of sponsors and their participants, said Will Hansen, chief governmental affairs officer at the American Retirement Association in Washington, who testified before the council last month.

"Any additional mandate from a plan audit perspective would be an increase (in) cost to comply with the new mandate as well as additional time the plan sponsor must spend on compliance," Mr. Hansen said. "The No. 1 and No. 2 reasons why employers don't provide a plan is cost and compliance, and the more burden we put on plan sponsors, the less likely an employer is going to open up a retirement plan."

ERISA requires annual audits of plans with 100 or more eligible participants at the beginning of the plan year. The audits, conducted by an independent qualified public accountant, examine such things as whether plan assets are fairly valued, whether contributions have been made in a timely manner and whether any transactions have been made that are prohibited under ERISA.

In its request to the council, which consists of 15 members appointed by the labor secretary to represent various interests in the retirement landscape, the DOL raised concerns about the "commoditization" of plan audits. It also, according to a notice published by the council last month, said plan administrators were not "sufficiently availing themselves of the audit process to re-examine inputs provided to the auditors, to take advantage of the routine operational discipline that a proper annual audit process should encourage, or to learn about improvements in the plan's documentation, operations, policies or procedures that could arise from a robust audit engagement."

Ian MacKay, Washington-based director to the Association of International Certified Professional Accountants' Employee Benefit Plan Audit Quality Center, agreed that plan sponsors may view audits as compliance commodities. "In too many cases, the price of an audit is lowballed just to get something done and filed with the (DOL) without really appreciating, understanding and getting the value out of the audit process," Mr. MacKay said.

In testimony before the council last month, James Haubrock, chairman of the AICPA's Employee Benefit Plan Audit Quality Center, said auditors provide a value to plan sponsors by communicating findings throughout the process to help them improve plan operations. Also, auditors can make recommendations that help improve the plan administrator's awareness of potential risk for misstatements in the financial reporting process, Mr. Haubrock added.

Mr. Hansen does not think plan sponsors simply go through the motions with respect to audits. "I 150% disagree, and I would appreciate for the Department of Labor to substantiate that (commoditization) claim," he said. "Plan sponsors are satisfying their fiduciary duty in selecting a plan auditor and having their plan audited. Now whether or not the audit is a quality audit falls to the auditor."

While the audit process might be something plan sponsors want to move on from quickly, Joy M. Napier-Joyce, a Baltimore-based employee benefits attorney at Jackson Lewis PC, said the sponsors with whom she works aim to run participant-friendly plans that follow the rules.

"If there were any changes that made it more difficult for the plan sponsors to maintain these plans or have certain features that require more administration, I wouldn't want that to be a deterrent for what they offer or how they offer it," Ms. Napier-Joyce said.

Part of what the council is examining is how plan sponsors approach the audit process, said Srinivas D. Reddy, senior vice president of retirement and income solutions at Principal Financial Group in Des Moines, Iowa, and chairman of the council.

Because the audit is mandated and does not provide a "tangible benefit to the plan sponsor, but is adding cost," the council is seeing whether plan sponsors are getting the full value of an audit, Mr. Reddy added.

He also raised the concern that some sponsors simply select the lowest cost auditor. "If you're having a medical procedure, would you go to the lowest cost surgeon you could find?" Mr. Reddy said. "When it comes to plan audits, I think a lot of plan sponsors unfortunately view them as a utility; you just go through the motions."

Mr. Hansen said there probably are plan sponsors that select auditors based on price because if the plan is based in a more rural area, its options could be limited. Also, the cost of an auditor is ultimately passed on to participants, he added.

"The participants pay for costs associated with maintaining retirement plans and the plan sponsors need to satisfy their fiduciary duty in ensuring that they're keeping these costs low while at the same time ensuring that the plan is maintaining its qualified status," Mr. Hansen said.

While audits are mandated annually, they also provide a useful service for plan sponsors, Ms. Napier-Joyce said. If an auditor flags something in a plan, it's better to be self-corrected than "thinking everything is kosher and then getting down the road and having it pulled up on an IRS or DOL audit," she said. "Your correction options are different then."

Timothy Rouse, executive director of the SPARK Institute, which represents retirement plan service providers and investment managers whose members serve 100 million participants in 401(k) and other defined contribution plans, said most plan sponsors also hire accounting firms to conduct plan reviews. The reviews look at things that are more beneficial to plan sponsors, such as asset allocation mixes, participant education and participant demographics. "From a fiduciary and management perspective, the plan reviews tend to get a lot more focused," Mr. Rouse said.

There is room to enhance education for all parties involved in the audit process, sources said.

The CPA association offers plan advisories on the subject, and EBSA could expand its efforts as well, Mr. MacKay noted. EBSA has a Fiduciary Education Campaign, which is a compliance assistance initiative to educate employers and service providers about their fiduciary responsibilities under ERISA, which includes information on selecting an auditor.

In April, Jeanne Klinefelter Wilson, EBSA's deputy assistant secretary for policy, asked the council to collect public input and make recommendations on ways the department could further educate employers about maximizing the value of the audit and the audit process.

"There's a great opportunity for EBSA to educate plan administrators," Mr. MacKay said. "We think (the Fiduciary Education Campaign) is beneficial and would like to see it expanded to explain how plan administrators can maximize the value from the audit process. It's important that the department communicate this because of the importance the DOL places on the audit and plan administrators and advisers look to DOL for guidance and education. So to expand the fiduciary education campaign would be a great start."

For Mr. Hansen, "If the DOL wants to move forward with some sort of education program or other resources based on their own data, that should be geared toward the audit community."

The council will host a second hearing on the audit process on Aug. 27 and will make a recommendation toward the end of the year.

"Any time there are a uniform set of rules and regulations that everyone follows, I think you have better consistency," Mr. Reddy said. "And today in the absence of that I think you have a much more varying degree of both scrutiny and rigor in the audit process."