Audit Trap to Avoid for 403(b) Plan Sponsors

by | Jan 27, 2015 | Institutional Services

The 2009 year was a watershed for 403(b) plans.  For the first time the Department of Labor (“DOL”) issued regulations requiring 403(b) plan sponsors to operate their plans more in line with traditional 401(k) plans.  The new requirements include a written plan document, fiduciary oversight procedures, annual governmental reporting, and administrative controls to monitor employee deferral limits, loans, and other participant transactions.  In addition, the DOL issued a whole new set of participant and plan level fee disclosure regulations that also applied to 403(b) plans.

Complicating all of this for 403(b) plan sponsors was that many had operated their plans in a multi-vendor environment where employees were able to choose among several different financial institutions, including fixed and variable annuity providers and mutual fund companies.  As a result, compliance had to be coordinated among a disparate group of service providers and service arrangements.

Since 2009, plan sponsors working with their consultants and vendors have made significant progress in working through all of these issues and for the most part have brought their plans into compliance.  However, every year brings a new compliance challenge that was initially unforeseen.  The most recent challenge revolves around satisfying the annual independent audit requirement imposed on plans with over 100 participants.

ERISA requires plans with over 100 participants to engage a CPA to perform an independent audit of the plan’s financial statements and internal controls, and file the auditor’s report with the annual form 5500.  This was a new requirement for 403(b) plans in 2009. The scope of the audit required to be performed is dependent upon how the assets are held. If the assets are held by a qualifying financial institution – such as a custodian, trust bank, or annuity contract – then a “limited scope” audit is sufficient.  Under those circumstances, the auditor can rely upon a certification from the qualifying financial institution that it has the proper controls in place.  If assets are not held by a qualifying financial institution, then the auditor is required to perform a “full scope” audit, resulting in higher costs to the plan sponsor.

While the majority of 403(b) plan assets are held in qualifying custodial accounts or annuity contracts, many plans allowed mutual fund companies to set up accounts to receive contributions outside of a custodial or trust account arrangement.  Further, many 403(b) plan sponsors maintained companion 401(a) plans that housed employer-related plan contributions that mimicked the 403(b) plan investment options.  The mutual fund companies under those arrangements have historically sent a certification for the 401(a) plan, but not for the 403(b) since there was no audit requirement prior to 2009.  After 2009, there was a misconception that the 401(a) certification covered both the 401(a) and the 403(b) plans, as the new regulations were not clear.

Mutual fund companies have since sharpened their process and have surprised many plans sponsors with the fact that they will no longer provide the certification necessary to allow for a limited scope audit on a 403(b) plan, even though it appears as though they had done so in the past.  The bad news is if you find yourself in this position, you are now required to have your auditor perform a “full scope” audit in order to obtain a favorable auditor’s report and complete your 5500 filing requirement.  The good news is this can be avoided in the future by contacting the mutual fund company to request that your 403(b) plan be moved to a custodial or trust arrangement.  It is important to do this prior to the start of the next year so that you can avoid being faced with the same costly “full scope” audit for that plan year.

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