How to Select an Auditor for the Form 5500

Every year, both the IRS and DOL require plans of a certain size to undergo an audit from an independent certified public account (CPA), and to submit a report from the CPA verifying that the plan has been operated in compliance with ERISA. Selecting the right auditor for the job is a crucial fiduciary decision that must be done with participants in mind. Since this process can oftentimes be overwhelming for plan sponsors, we put together this guide answering common questions we receive on how to select the right auditor.

What is the Purpose of an Auditor and What Makes a Good Auditor?

When administering a 401(k) plan, there are many mistakes that plan sponsors commonly make which could expose them to costly corrections and penalties. These include…

  • Incorrectly determining eligibility for new participants
  • Failing to deposit deferrals in a timely manner
  • Having discrepancies between the payroll and recordkeeping systems
  • …and many more

The purpose of a 401(k) auditor is to help uncover these mistakes so that the plan sponsor can proactively fix them before they snowball into even bigger and more costly problems. In addition, good 401(k) auditors will review your administration processes for weaknesses, and make recommendations for improvement of those processes to help reduce risk.

Are There Any Specific Requirements an Appropriate Auditor Must Meet?

There are two major requirements a 401(k) auditor must meet:

  1. They Must be Certified: an auditor to the plan must be licensed or certified as a public accountant by a state regulatory authority. 
  2. They Must be Independent: the auditor cannot have any financial or other conflict of interest with respect to the plan or the plan sponsor that would affect the auditor’s ability to render an objective, unbiased opinion about the plan. For example, if the owner of a travel company were also a licensed CPA, they would not be able to retain themselves as the auditor for their own company.

What Attributes Should a Plan Sponsor Look for in an Auditor?

Given that retirement plans are unique, complex, and can be very costly things to mess up, experience with retirement plans is easily the most valuable quality you can find in an auditor. An auditor who specializes in retirement plans is much more likely to spot issues in the plan, and can help you complete your audit as efficiently as possible.

Because the auditor must be licensed with a state regulatory agency, plan sponsors should also confirm with the relevant agency that the retained auditor’s license is active and in good standing.

How Can a Plan Sponsor Be Sure the Auditor is Doing the Necessary Work?

The DOL has issued some guidance on good criteria for evaluating an auditor. The DOL advises that an auditor should be able to explain:

  1. Whether plan assets have been fairly reported on the annual report
  2. Whether plan obligations are properly stated and described
  3. Whether contributions to the plan were properly calculated and timely received (like the deposit of employee deferrals discussed above)
  4. Whether benefit payments were made in accordance with plan terms
  5. Whether employees were properly included or excluded from participation in the plan (as mentioned above regarding eligibility)
  6. Whether participant accounts or benefit statements, as applicable, are fairly stated
  7. Whether the auditor identified any issues that would affect the plan’s tax status (like a document, demographic, or operational failure)
  8. Whether any prohibited transactions were identified and reported

Where Can I Start Looking for Auditors?

The American Institute of CPAs (the AICPA), a member association representing the accounting profession, maintains an Employee Benefit Plan Audit Quality Center. This Center is a voluntary membership center for firms that audit employee benefit plans. You can search for member firms by name and by state through their website: 

https://www.aicpa.org/interestareas/employeebenefitplanauditquality.html