How to Prepare for a 401(k) Audit

If the term ”audit” makes you uncomfortable, anxious or even scared, you are not alone. Last year, the Department of Labor (DOL) closed 1,122 civil investigations with 754 (67%), resulting in fees, repayments or corrective actions.[1] The agency collected over $3.12 billion in direct payments to plans, participants and beneficiaries. This represents a whopping 300% increase in just five years.[2]

From this perspective, you might think there is no chance that you’re walking out of an audit unscathed. However, the outlook is a little less bleak when you realize that in the US, there are nearly 722,000 retirement plans and only 1,122 escalated to investigation.

So instead of viewing the DOL as the boogey monster or fearing a 401(k) audit, let’s take a look at the utility behind audits, identify red flags and establish best practices to help demystify the process.

What is a 401(k) Audit?

There are different kinds of retirement plan audits.  Large plans – those with more than 100 participants – must schedule an annual audit with an independent auditing firm.  The independent firm helps the plan sponsor make sure they are adhering to the guidelines and regulations set by the DOL and IRS.  An independent audit can help prevent errors while helping sponsors correct mistakes that left alone could create greater problems or trigger a government audit.  Plan sponsors may have greater concern if they receive an audit request from the DOL or IRS.

What are Audit Red Flags?

Frequently, DOL or IRS audits result from a situation that might be avoided.  Consider these audit red flags and what you can do to minimize their occurrence.

Employee Complaints

Individual complaints from employees are a frequent source of DOL investigations. From a total of 171,863 inquiries from workers, 357 resulted in the opening of new investigations and more than half of all monetary recoveries relate to benefits of terminated vested participants of defined benefit plans.[3] The simple lesson here is that plan sponsors must establish clear protocols for how participants can communicate questions or complaints about their benefits to the plan sponsor before filing complaints with the DOL. Quick and effective responses are critical.

DOL Enforcement Priorities
Examinations may also relate to enforcement priorities launched by the DOL.  As of this publication, the agency “continues to focus its enforcement resources on areas that have the greatest impact on the protection of plan assets and participants’ benefits.”[4]  Recent priorities include plan sponsors’ attention to the cybersecurity policies of their service providers and their tracking of terminated participants.

Delinquent Contributions and other Missteps
Delinquent contributions are pursued as part of an ongoing national priority. These are easy pickings for the DOL and a clear violation of the most basic fiduciary standards. This should be done within the given year’s contribution-eligible time period and at a consistent time each pay to avoid attention from the IRS/DOL.

Plan sponsors are encouraged to review their Form 5500 and other records to spot missed contributions and other trouble points, such as:

  • Inadequate ERISA bond (10% of plan assets or $500,000, whichever is less, unless plan investments include company stock).
  • Assets not held in trust
  • Paying unreasonable compensation to service providers (conduct regular fee benchmarking to avoid this)
  • Paying expenses from the plan that are actually expenses of the employer. (Known as “settlor expenses,” these costs include consulting services regarding plan design or plan termination.)

A Knock at the Door

If you happen to receive a notice from the DOL about an audit or an investigation, your response should be the same:

  • Take a deep breath.
  • Put your team together and choose a qualified primary contact person.
  • Strongly consider engaging ERISA counsel. Expert help may avoid missteps and provide an intermediary for difficult conversations.
  • Consider requesting an extension of time to respond. Many initial deadlines can be short for complex exams. Extensions, if reasonable, are routinely granted.
  • Review all documents prior to production. Be ready to report any issues found.
  • Deliver documents in neat and organized fashion.
  • Prepare employees for interviews. Treat it like a deposition. Caution them to take their time, thoughtfully consider their responses and ask for clarification of any questions they do not understand.
  • Always be truthful and respectful.


What Documents are Typically Requested?

The sheer volume of documents requested may at first seem overwhelming, but the requests will be for documents you should have readily available in your files. They include:

  • Plan document, Summary Plan Description (SPD), Summary of Material Modification (SMM)
  • Investment Policy Statement, plan records of fees/expenses
  • Form 5500
  • Participant fee disclosures (404a5), benefit statements and notifications
  • Service provider contracts and fee disclosures (408b2)
  • Participant claims and benefits data
  • ERISA Bond and any fiduciary liability insurance
  • Fiduciary committee charters, committee meeting minutes and other records
  • Documents about your company and organizational charts
  • More recently, cybersecurity practices


Stay Prepared

Whether you are subject to a routine audit or a red flag prompts an investigation, it is important to remember that fiduciary vigilance is key. The best preparation is to follow sound operational procedures every day and not fall behind.



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This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

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[1] Department of Labor. “Fact Sheet. EBSA Restores Over $3.1 Billion to Employee Benefit Plans, Participants and Beneficiaries.”  2020.

[2] Ibid.

[3] Ibid.

[4] Employee Benefits Security Administration. “Enforcement.” Accessed 2021.