How Do Recordkeepers and TPAs Affect Your ERISA Audit?

In Brief:

• Recordkeepers track participant accounts, contributions, loans, and distributions, while TPAs handle compliance testing, employer contribution calculations, and Form 5500 preparation.
• The accuracy of service provider records largely determines how much follow-up the audit requires.
• A SOC 1 Type 2 report showing effective provider controls may reduce audit testing. Without one, auditors may need to do more.
• Slow provider responses can delay fieldwork and put pressure on the Form 5500 filing deadline.
• Plan sponsors remain fiduciaries. They are responsible for accurate payroll and census data, monitoring providers, the plan’s financial statements, and timely Form 5500 filing.

Recordkeepers and third-party administrators (TPAs) often play an important role in the annual ERISA audit. These outside service providers handle much of the day-to-day administration of retirement plans and maintain the information auditors need to complete the engagement. This is why recent changes to either provider is of interest to auditors because they play such an important role in the process. The accuracy of information, along with the efficiency and responsiveness of the providers, can have a direct effect on the audit process. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.

What is the Difference Between Recordkeepers and TPAs?

Recordkeepers and TPAs serve different functions in retirement plan administration.

• Recordkeepers typically track participant contributions, investments, and account balances; process or record distributions and participant loans; provide participant statements and online account access; and maintain financial records and transaction reports used in the audit.
• Third-party administrators typically administer the plan per federal guidelines; perform annual nondiscrimination and compliance testing; calculate employer contributions; prepare or coordinate Form 5500, and assist with plan documents and amendments.

Many organizations bundle recordkeeping and TPA services. It’s common, however, for smaller plan sponsors, however, to work with separate providers. The specific division of responsibilities depends on the services included in each agreement. It’s important to note that although recordkeeping and administration may be outsourced, the plan sponsor retains fiduciary and oversight responsibilities.

Where Service Providers Have the Greatest Impact 

Because recordkeepers and TPAs maintain most of the information auditors examine, they influence nearly every stage of the audit, from planning and testing to the final timeline. The impact is greatest in three areas:

Accurate records — Provider records are the starting point for much of the audit. Recordkeepers supply reports showing plan balances and financial activity. TPAs provide information about eligibility and compliance testing. Auditors test these records against information from the employer, so the accuracy of provider data largely determines how much follow-up the audit requires.

Compliance testing results may also be reviewed. If a plan passes the nondiscrimination testing, those records will be checked and possibly sampled for accuracy. If the plan fails, the resulting corrective action will be carefully examined for follow-through.

Strong internal controls — Internal controls help service providers process transactions with fidelity and maintain reliable financial records. Many recordkeepers and TPAs provide SOC 1 Type 2 reports, which address controls relevant to financial reporting. When a relevant SOC 1 report shows controls operating effectively, auditors may be able to adjust the nature or extent of the testing. If no report is available, auditors may need to perform additional testing. SOC 1 reports also identify controls the employer is expected to maintain, such as reviewing payroll files before they are sent to the recordkeeper, and auditors will confirm those are in place.

Timely responses — Response times directly affect the audit schedule. Recordkeepers and TPAs typically supply audit packages containing financial reports and supporting schedules, and auditors may request additional documentation at any time. For example, when an auditor selects a participant loan for testing, a recordkeeper that can quickly provide the relevant information allows that part of the audit to move forward without delay. Late reports or slow answers can push back fieldwork and put pressure on the Form 5500 filing deadline.

The Plan Sponsor’s Role

Outsourcing plan administration shifts much of the day-to-day work to service providers, but the plan sponsor remains the fiduciary. Plan sponsors still have responsibilities related to plan administration and the ERISA audit.

First, recordkeepers and TPAs rely on the employer for census information, payroll data and for notice of plan changes. If there is an error in the employer’s data, it will likely appear in service provider records as well. For example, a midyear rehire needs to be reported with the employee’s prior service so the TPA can apply eligibility and vesting rules correctly.

The Department of Labor also expects sponsors to monitor providers by reviewing reports, performance, fees and by following up on participant complaints. Auditors consider these sponsor-level controls when planning the audit, and regular monitoring allows errors to be resolved during the year rather than during the audit. Ahead of the audit, sponsors can also confirm which provider will supply each report and when, so a complete package is received from the start.

Plan management is responsible for the plan’s financial statements, even when providers supply most of the underlying information. The plan administrator also remains responsible for filing an accurate Form 5500 on time, even if a TPA prepares it. Consulting with an experienced advisor is recommended.

We’re Here to Help

Accurate recordkeeping and responsive service providers can help make the annual ERISA audit more efficient. Plan sponsors who understand the roles of recordkeepers and TPAs and stay involved with the providers throughout the year are better positioned when the audit begins. If you have questions about the information outlined above or need assistance with another tax or accounting issue, JLK Rosenberger can help. For additional information call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.