For many years, retirement plan sponsors assumed regulatory audits were primarily a concern for larger plans, particularly those subject to the annual independent audit requirement.
While larger plans continue to receive significant scrutiny, our experience over the past year suggests that assumption is becoming increasingly outdated.
At Twelve Points Retirement Advisors, we have observed a noticeable increase in IRS and Department of Labor examinations involving smaller retirement plans, including plans with assets as low as $2 million that are not subject to an annual ERISA audit. Perhaps even more surprising, these examinations often appear to occur without any obvious triggering event.
Whether this reflects a shift in enforcement strategy, improved data analytics, or simply random selection, the practical reality for plan sponsors is the same: no plan should assume it is too small to be audited.
The Biggest Challenge Isn’t the Audit. It’s the Preparation.
When an audit notice arrives, the biggest source of stress is rarely the audit itself.
It’s the realization that the requested documentation may not be organized, readily available, or even complete. We have seen organizations spend weeks gathering historical committee meeting minutes, signed plan documents and amendments, payroll records, employee eligibility information, investment monitoring reports, participant notices, service provider agreements, fiduciary committee documentation, fee benchmarking analyses, and correction records for prior operational issues.
None of these items are unusual requests. In fact, they represent the basic evidence regulators expect to see demonstrating that a plan has been operated prudently and in accordance with its governing documents. The scramble occurs because many organizations simply have never centralized these materials.
Good Governance Is the Best Audit Preparation
The good news is that preparing for a potential audit doesn’t require creating mountains of new documentation.
It requires maintaining the documentation that prudent fiduciaries should already have. A well-governed retirement plan should be able to quickly produce documentation showing:
- The current signed plan document and all required amendments
- Adoption agreements and summary plan descriptions
- Retirement Plan Committee charters and meeting minutes
- Investment policy statements and monitoring reports
- Service provider agreements and fee disclosures
- Payroll and contribution procedures
- Documentation supporting eligibility and compensation determinations
- Annual participant notices
- Cybersecurity policies and procedures
- Documentation of any operational corrections that have been made
Having these materials organized before they are requested can dramatically reduce the disruption associated with an examination.
Policies Matter More Than Many Sponsors Realize
One area where many sponsors find themselves vulnerable is the absence of documented administrative policies.
Regulators increasingly want to understand not only what happened, but how plan operations are intended to work. That includes documented procedures for processing employee deferrals, timely remittance of contributions, determining eligible compensation, monitoring payroll changes, tracking employee eligibility, handling participant distributions and loans, reviewing forfeiture accounts, and reviewing payroll files before each contribution submission.
Written procedures help demonstrate that the sponsor has established prudent administrative controls, even if an occasional operational error occurs.
Conduct Your Own “Mock Audit”
One of the best exercises a plan sponsor can perform is to ask a simple question: if we received an IRS or DOL audit letter tomorrow morning, could we produce everything being requested within a few days?
If the answer is probably not, now is the time to identify the gaps. Many organizations find value in conducting a periodic governance review or mock audit that evaluates:
- Required fiduciary documentation
- Operational procedures
- Committee governance
- Payroll controls
- Service provider oversight
- Fiduciary file organization
Finding weaknesses internally is far preferable to discovering them after receiving an audit notice.
Don’t Wait Until the Letter Arrives
Most retirement plans are operated by people who are trying to do the right thing, and regulators understand that operational mistakes occur.
What becomes much more difficult is demonstrating prudent fiduciary oversight when documentation is incomplete, scattered across multiple departments, or created only after an audit begins.
A modest investment in governance, documentation, and administrative controls today can significantly reduce the time, disruption, and stress associated with a future examination. As we’ve seen with an increasing number of smaller plans, regulatory audits are no longer something only large employers need to think about. Every plan sponsor should operate under the assumption that an audit could happen and be prepared long before it does.
How Twelve Points
Can Help
At Twelve Points Retirement Advisors, we routinely help plan sponsors strengthen their governance processes before regulators come calling.
From committee governance and fiduciary documentation to payroll controls, operational policies, vendor oversight, and mock audit readiness reviews, our goal is to ensure that an audit becomes an administrative exercise, not a crisis.
Preparation doesn’t eliminate the possibility of an examination, but it does make the experience considerably less disruptive. If you’d like help evaluating your plan’s audit readiness, contact our team at Twelve Points Retirement Advisors to get started.
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