Many plan sponsors view an annual retirement plan audit as an isolated event. The auditor arrives, requests documents, asks questions, and eventually issues a report. In reality, the success or failure of a retirement plan audit is determined long before the auditor ever walks through the door.
A clean audit is the result of strong processes operating throughout the year. Eligibility tracking, timely deposit of employee deferrals, payroll reconciliation, loan administration, hardship distributions, and proper documentation all play a role. When these processes are functioning properly, the audit tends to go smoothly. When they are not, the auditor simply becomes the person who discovers the problem.
One of the biggest misconceptions among plan sponsors is that auditors create compliance issues. They do not. Auditors uncover issues that already exist. If employee deferrals were deposited late, if participants were improperly excluded, or if compensation was calculated incorrectly, those problems began months or years before the audit started.
The best way to prepare for an audit is not by scrambling to gather documents at year-end. It is by maintaining strong controls every day of the year. Establish written procedures. Reconcile payroll regularly. Review service provider reports. Conduct periodic internal reviews. Most importantly, document key decisions and maintain organized records.
An audit should never be viewed as a compliance exercise that occurs once a year. It should be viewed as the final examination of processes that operate continuously.
The retirement plans that experience the fewest audit issues are not necessarily the largest or most sophisticated. They are the plans with disciplined procedures, clear responsibilities, and a commitment to getting things right before an auditor asks questions.
Your retirement plan audit starts long before the auditor arrives. In many cases, it starts with the very first payroll of the plan year.