AUDITING PENSION PLANS: TOP 10 MOST COMMON AUDIT FINDNGS and OVERVIEW OF DOL INITATIVES

AFFECTING PLAN AUDITS

Concurrent session 16Allen P. Deleon, CPA – DeLeon & Stang, CPAS &

AdvisorsIan Dingwall, CPA - Chief Accountant

DOL Employee Benefits Security Administration

Allen P. DeLeon, CPA

Founding Partner, Deleon & Stang, CPAs and Advisors

Member of the AICPA Credit Union Conference Planning Committee and the AICPA Benefit Plan Audit Quality Center

Chair, Maryland Association of CPAs

Contact information:• 301-948-9825• allen@deleonandstang.com• @allendeleon

401k Plan Auditing Concerns and Issues

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BASIC OVERVIEW OF A 401k PLAN AUDIT

A 401k plan is a type of defined contribution plan, which means that the participants account balance equals his plan benefits.

A “qualified” plan established by employers to which eligible employees may make “salary deferral” contributions on a post-tax and/or pre-tax basis.

“Qualified” means meets the standards set forth in section 401, paragraph (k) of the Internal Revenue code.

“Salary deferral” is money that is deducted from your paycheck before taxes are withdrawn. Some plans do allow you to contribute money on an after-tax basis as well.

Participant data• Eligibility• Auto enrollment

Contributions

Contribution limits• Increasing limits EGTRRA• Catch up contributions• Rollover

Vesting & forfeiture

Eligible compensation

Portability

Salary deferral

Employer match

Roth contributions

Testing 415 (c) limits

ADP/ACP testing limits

Timeliness & reporting

FEATURES OF A 401k PLAN

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Investments• Elections (participant

directed vs. non-participant directed)

• Frequency of changes to elections

• Types of investments• Valuation methods (daily

valuation)

Benefit Payments• Distributions• Timing• Rollover• Reporting

Other• Participant loans• PII• PT’s• Expenses and new

reporting

FEATURES OF A 401k PLAN (CONTINUED)

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WHAT IS DIFFERENT ABOUT 401k PLANS

Employee contributions can vary, up to the maximum allowed by law ($16,500 for 2012)

Employee contributions are made pre-tax

Many employers will match a portion of employee contributions

Investment earnings are tax deferred until withdrawn at retirement age.

An excise tax penalty is imposed if distributions are taken from the plan prior to retirement age (591/2)

HOW THE PROCESS WORKS

KEY PLAYERS AND ROLES

Plan Sponsor – employer and decides on plan features

Plan Administrator – responsible for operation of the plan. Can be employer or third party

Custodian/Trustee- Hold plan assets in trust

Record-keeper- maintain participant accounts, prepares 5500 etc..

Oversight Agencies- • Department of Labor (DOL)• Internal Revenue Service (IRS)

INITIAL OR FIRST TIME 401k PLAN AUDIT TIPS

Engagement letter

Communicate with predecessor auditor and review work papers

What type is audit is required? Full or limited scope?

Who are the service providers• Trustee• Record keeper• Sponsor

INITIAL OR FIRST TIME 401k PLAN AUDIT TIPS (continued)

Risk assessment and get a feel for the quality of records and what SOC reports are available

Read plan document and amendments and understand the plan

Opening balances:• What procedures need to be performed?• Participant data

MOST COMMON EBP PLAN AUDITING MISTAKES

< 100 participants? Is an audit necessary?

Full scope audit vs. limited scope audit? What is the difference?

Too much reliance on SOC reports

Contributions based on correct plan definition of compensation?

Supplemental schedules:• Delinquent participant contributions• Assets held• 5% reportable contributions

Limited Scope vs. Full Scope

Audit Procedures Limited Scope Full Scope

Confirm assets directly with custodian X

Agree the certified investment information to the Plan’s financial statements

X

Year-end market value testing and leveling X

Investment transaction testing X

Test investment income allocation to participants

X X

Determine that the Plan’s financial statement and disclosures are in compliance with GAAP

X X

MOST COMMON EBP PLAN AUDITING MISTAKES

No or limited fraud assessment – Examples of EBP Fraud• Eligibility – person entered into the HR system and enrolled into

the plan who never actually began work• Fictious employee who then took out 401k plan loans• Participant who faked his death to get money out of the plan• HR employee who handled both plan contributions and payroll

and reconciled payroll bank account diverted money to personal accounts

• HR director made changes to employer contributions before submitting file to TPA

MOST COMMON EBP PLAN AUDITING MISTAKES

No or limited fraud assessment – Examples of EBP Fraud (continued)• HR employee manually processed participant statements to

hide loans• Employee said car loan was for home purchase to get longer

amortization period• Plan administrator used forfeiture account to pay personal credit

card expenses.• Plan administrator paid himself by setting up a fake vendor and

paying himself and approving invoices.

Questions?????

DOL Initiatives Affecting Your EBP Audits

Ian Dingwall, CPA

Chief Accountant

DOL

Employee Benefits Security

Administration

The views expressed are those of the speaker and do not necessarily represent the official position of the Department

Overview of DOL Initiatives Affecting Employee Benefit Plan (EBP) Audits

DOL Current Focus

EBSA Audit Quality Initiatives

Fraud in EBPs

Regulatory Initiatives

What is EBSA’s Current Focus?

High Risk Audit Engagements

Multi-employer Plans• Defined Benefit Pension Plans• Defined Contribution Pension Plans

Single Employer Defined Benefit Pension Plans

Health and Welfare Plans

ESOPs

403(b) Plans

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ESOPs

Over 50% of audits contained deficiencies

Common audit deficiencies include:• Failure to identify valuation of employer stock in the

risk assessment• Review of the work of the appraiser (full scope audits)• Testing the release of shares from the suspense

account• Testing benefit payments• Obtaining and reviewing documentation of stock

purchases• Party-In-Interest = inadequate or no audit work

performed19

403(b) Plan Audits

Review of 84 sets of 2009 403(b) plan audit work papers

Firms of all sizes

Opinions varied and included• Clean limited-scope• FAB language• Recordkeeping language

Work on opening balances varied greatly

What will OCA deem rejectable?

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Reporting Compliance Initiatives

• Electronic Communication w/Filers

• Schedule C Compliance

• Reporting of Funded Welfare Plans

• Missing IQPA Reports

• Collaboration w/IRS & PBGC

EBSA Audit Quality Initiatives

Firm Inspections

Mini Inspections

Small Practice Reviews

CPA Firm Inspection Program

Review EBP practice of firms that perform significant number of plan audits or that audit significant amount of plan assets

Similar to PCAOB Inspections

Review policies and procedures

Review audit work papers of selected audit engagements

CPA Firm Mini Inspections

Focus on CPA firms that perform between 100-199 plan audits

No initial onsite visit

Questionnaire to CPA firm

Assess overall firm structure and control environment

Select a sample of audit engagements for detailed review

Small Practice Reviews

Focus is on firms performing a small number of EBP audits

EBSA Office of Chief Accountant reviews workpapers of selected audit areas

Scope of review may be expanded

Reviews performed in-house

What To Expect From Us

Inquiry letter to plan administrator

Review of audit workpapers

Statement of Preliminary Findings

Rejection of plan filing

Assessment of civil penalties

Referral to AICPA/state regulators

Audit Deficiencies Found in Workpaper Reviews

1,946 Workpaper Reviews Performed

• 1,324 – No Deficiencies

• 622 – Contain Deficiencies

- 199 – 1 Deficiency

- 148 – 2 Deficiencies

- 95 – 3 Deficiencies

- 62 – 4 Deficiencies

- 46 – 5 Deficiencies

- 72 – 6+ Deficiencies

EBP Audit Best Practices

Commitment to Quality• Executive Level• Firm-wide

Importance of EBP Audit Practice• Focal point within firm• Realistic audit fees• Comprehensive EBP specific resources

Internal Inspection Programs

Use of Internal Experts

Fraud in EBP

“Sandhogs” Union Local 147 • $40 million embezzlement by fund administrator

DOL Criminal Enforcement Cases• News releases at http://

www.dol.gov/ebsa/newsroom/criminal/main.html

DOL’s expectations and auditor’s responsibilities

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DOL Regulatory Initiatives

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Informed Decision Making and Excessive Fees – The Three Legged Stool

Disclosures by plans to participants of certain plan and investment-related information – Interim Final 10/20/10

Disclosures to plan fiduciaries to assist in assessing 408(b)(2) reasonableness of compensation and potential conflicts of interest – Interim Final 7/16/10

Disclosures to public and government on electronically filed Form 5500 Annual Report including indirect compensation – Form 5500, Schedule C

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Fee & Expense Disclosures – Plan to Participant (ERISA §404)

Effective – plan years beginning on or after 11/1/11

Requires fiduciaries to:

Give workers quarterly statements of plan fees & expenses deducted from their accounts

Give workers core information about investments available under the plan

Use standardized methodologies when calculating and disclosing expense and return information

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Fee & Expense Disclosures – Plan to Participant (ERISA §404) (continued)

Centerpiece – a requirement to provide investment-related advice in a format that permits workers to comparison shop among investment options

DOL has developed a model chart for complying with this requirement

The reg., model chart, and fact sheet may be viewed at www.dol.gov/ebsa

Fee & Expense Disclosures – Service Providers to Plans (ERISA §408(b)(2))

Brings new transparency to the process of selecting and monitoring of plan service providers

Establishes comprehensive disclosures from service providers concerning services, fees, and potential conflicts of interest

Applies to plan contracts or arrangements for services in existence on or after 7/1/12, extended from 7/16/11, 1/1/12 and 4/1/2012

Applies to covered service contracts ≥ $1,000

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ERISA § 404 Disclosures – Initial Implementation Dates

First disclosure dates follow the effective date of the 408(b)(2) regulation

Initial annual chart disclosure of “plan level” & “investment-level” info – 8/30/12

First quarterly statements – 11/14/12

Clients need your pro active help

Clarification of the Meaning of “Reasonable Arrangement” in 408(b)(2) Disclosure Rules

All service agreements must be in writing (no prescribed format)

Impose new service provider disclosure obligations before or at the time the plan enters a service agreement

408(b)(2) Disclosure Rules – Covered Service Providers

Persons who provide services as an ERISA fiduciary or under the Investment Advisors Act of 1940.

Persons who provide certain recordkeeping or brokerage services and make available investment options to be offered by the plan

Persons who receive or may receive indirect compensation for the following services: accounting, auditing, actuarial, appraisal, banking, consulting, custodial, insurance, investment advisory (plan or participants), legal, recordkeeping, brokerage, TPA, or valuation

408(b)(2) – Required Disclosures

Service providers are required to disclose (before the parties enter into an agreement for services):• All services to be provided under the agreement• The compensation or fees to be received for each

service• The manner of receipt of compensation or fees• Information about conflicts of interest.

Establishes disclosure burden on service provider – integrated with 2009 Form 5500 Schedule C Reporting

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Consequences of Non Disclosure = Prohibited Transaction

Contract or arrangement will not be “reasonable” and violates 408(b)(2)

Responsible Plan Fiduciary violates 406(a)(1)(c) by participating in the prohibited transaction. Reportable on Schedule G

Service provider is a “disqualified person” under IRS prohibited transaction rules and is subject to excise taxes under Code section 4975

Investment Advice

Final rule published in the Federal Register – October 25, 2011

Designed to improve participant access to fiduciary investment advice

Permits a fiduciary investment adviser who receives additional fees from investment providers if certain conditions are met• Use of a computer model that is certified as unbiased by

an independent expert or • Through an adviser compensated on a “level-fee” basis,

meaning that the fees do not vary based on investments selected

May be viewed at http://s.dol.gov/J4

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Definition of Fiduciary Project

DOL intends to re-issue proposed rule

The purpose of the reg. is to ensure that potential conflicts of interest among advisors do not compromise the quality of investment advice

The proposed reg. would more broadly define “fiduciary” when a person provides investment advice

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Definition of Fiduciary Project - Continued

Revisions are likely to:• Be limited to individualized advice directed to specific parties• Address concerns about the effect of the reg. on routine appraisals and arm’s-length commercial transactions

Anticipated exemptions will:• Address current fee practices of brokers and advisors• Clarify that longtime exemptions that allow certain commissions will still apply

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Interim Policy on Electronic Disclosures

Technical Release 2011-03

Expands the ability of plans to use electronic disclosure requirements under DOL’s final participant-level fee disclosure regulation

Allows plan administrators to furnish information electronically while ensuring that all employees will benefit from the regulation’s increased transparency

Includes the use of continuous access websites if certain conditions and safeguards are met

DOL will not take enforcement action solely based on a plan administrator’s use of electronic technologies

Please see: www.dol.gov/EBSA/pdf/tr11-03.pdf

Guidance for Apprenticeship & Training Programs – FAB 2012-01

Issued 4/2/12

Provides guidance regarding plans paying graduation ceremony and advertising expenses

Certain “modest” graduation ceremony and outreach expenses are permissible

Violations more prevalent where plans lack written expense policies & internal controls

OLMS has published a list of useful internal controls

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Reporting Compliance Initiatives

• Electronic Communication w/Filers

• Schedule C Compliance

• Reporting of Funded Welfare Plans

• Missing IQPA Reports

• Collaboration w/IRS & PBGC

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And Now it’s Your Turn…