There are many reasons for 401(k) plan sponsors (and their advisors) to do everything possible to avoid a Department of Labor (DOL) 401(k) audit. They can be costly, time consuming and generally unpleasant.
The DOL, in its fact sheet for fiscal year 2016, indicates that the Employee Benefits Security Administration (EBSA) closed 2,002 civil investigations with 1,356 of those cases (67.7 percent) resulting in monetary penalties/additional contributions. The total amount EBSA recovered for Employee Retirement Income Security Act (ERISA) plan participants last year was $777.5 million.
In my experience, if you receive notification from the DOL that it has an interest in looking over your 401(k) plan, you need to be concerned. Not only do the statistics above support the fact that DOL auditors do a good job of uncovering problems, but in my opinion, they are not an easy group to negotiate with to fix deficiencies.
As a result, I believe the best policy to follow to ensure you don’t receive a visit from a DOL representative is to do everything possible to avoid encouraging such a visit. Here are some suggestions that may help you avoid a DOL 401(k) audit:
- Always respond to employee inquiries in a timely way. The most frequent trigger for a DOL 401(k) audit is a complaint received from a current or former employee. These complaints can originate from employees you have terminated who feel poorly treated or existing employees who feel ignored. Make sure you are sensitive to employee concerns and respond in a timely way to all questions. Keep copies of any correspondence. Be very professional in how you treat those individuals who are terminated – even though in certain instances that may be difficult. Terminated employees who feel they have been mistreated often call the DOL to “get back” at an employer.
- Improve employee communication. Often employee frustrations come from not understanding a benefit program – or worse, misunderstanding it. If you are aware that employees are frustrated with your plan or there is a lot of behind the scenes discussion about it, schedule an education meeting as soon as possible to explain plan provisions.
- Fix your plan – now. If the DOL decides to audit your 401(k) plan, as shown above, it frequently finds something wrong. Many times plan sponsors are aware that a certain provision in the plan is a friction point for employees. Or worse, they know the plan is broken and no one has taken the time to fix it. Contact your benefits consultant, record keeper or benefits attorney to address these trouble spots before they cause an employee to call the DOL.
- Conduct a “mock” DOL 401(k) audit. Many 401k plan sponsors have found it helpful to conduct a mock audit of their plan or hire a consulting firm to do one for them. If management hasn’t been responsive to your concerns about addressing a plan issue, having evidence to share with them that shows an audit failure can be very convincing.
- Make sure your 5500 is filed correctly. The second most frequent cause of a DOL 401(k) audit relates to the annual Form 5500 filing. The most common 5500 errors include failing to file on time, not including all required schedules and failing to answer multiple-part questions. Ensure that your 5500 is filed by a competent provider and that it is filed on time. Most plan sponsors either use their record keeper or accountant to file their plan’s 5500. Don’t do it yourself. The fees a provider will charge to do the work for you are very reasonable.
- Don’t be late with contribution submissions. Surprisingly, many employers still don’t view participant 401(k) contributions as participant money. They are, and the DOL is very interested in ensuring that participant 401(k) contributions are submitted promptly to the trustee. Be very consistent and timely with your deposits to the trust. Participants will track how long it takes for their payroll deductions to hit the trust. If they aren’t happy with how quickly that happens, they may call the DOL. If you have forgotten to submit a payroll to the trustee, or think you may have been late, call your benefits attorney. There are procedures to follow for late contribution submissions.
DOL audits are generally not pleasant. It wouldn’t be too strong to say that they are often adversarial. Because these visits are typically generated by employee complaints or Form 5500 errors, auditors have a pretty good idea that something is wrong. Consequently, I recommend that plan sponsors do everything they can to avoid a DOL 401(k) audit.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.
