Do You Have an RFP Template for a 401(k) | 403(b) Plan Audit?

Do You Have a Template for a Request for Proposal (RFP) for a 401(k)/403(b) Plan?

Almost every time I present an educational seminar, at least one attendee asks me if I have a template for a retirement plan audit RFP.

After discussing the importance of selecting a quality plan auditor and providing a list of what should be provided, requested, and the criteria that should be considered, I will provide an RFP outline of the items that make an effective RMD and then a template of an RFP that can be tailored to each plan’s specific needs.

Background

The sponsor of a retirement plan is the Plan Administrator charged with the responsibility of operating the plan in accordance with its terms and with the fiduciary duty of acting in the best interest of the plan participants. The Plan Administrator can delegate many of its administrative and operational responsibilities to another individual or entity, including a pooled plan provider, a third-party administrator, a recordkeeper, and/or an investment advisor, but it always retains the ultimate responsibility for their selection and for their actions. But that’s not all…

When large employee benefit plans require an audit, it is the Plan Administrator’s responsibility to hire an independent qualified public accountant (IQPA). Hiring an auditor is a fiduciary function, such that the Plan Administrator must exercise the same care and prudence in hiring a plan auditor as it does when selecting all the other plan service providers. Similar to other service providers, the Plan Administrator cannot fully delegate the responsibility over the plan’s financial statements to the plan auditor. In fact, the Employee Retirement Income Security Act of 1974 (ERISA) holds Plan Administrators responsible for ensuring that plan financial statements are properly audited in accordance with generally accepted auditing standards (GAAS).

Historically, DOL studies of audit quality have found that over 90% of the nation’s auditors perform less than 25 audits, and those auditors have a deficiency rate above 65%. 6% of the nation’s auditors perform between 25 and 99 audits, and those auditors have a 42% deficiency rate. It means that if your auditor performs less than 100 audits, you have a 50-50 chance that your financial statements include deficiencies. About 750 firms nationwide perform more than 100 audits, and those firms have a 12% deficiency rate. If your audit firm performs 100 audits or more, the odds are in your favor that your audited financial statements do not contain deficiencies.

When a plan auditor is declared deficient by the DOL, the auditor can be sent to the ethics division of the corresponding Board of Accountancy, three years of previously accepted Forms 5500 can be rejected, and the audits have to be redone by a different accounting firm. Belfint, Lyons, & Shuman has performed re-audits when accountants for a takeover client were declared deficient. The DOL assesses penalties to the plan sponsor when the audit is deficient. Hiring a firm that lacks knowledge of the specialized nature of the industry and skills necessary to perform plan audits conflicts with the stated goal of ERISA to protect plan participants.

Are Plan Audits a Priority to the Prospective Audit Firm?

The RFP should ask whether the team performing your audit includes industry specialists, or whether the retirement plan audit is merely an add-on service that is a lower priority for an accounting firm that provides other services to your entity. There are many audit firms that have developed specialized retirement plan audit practices where the plan audit is not a secondary priority to the accounting firm.

The first step towards establishing whether the audit firm is committed to providing quality audits to ERISA plans is to determine whether the firm belongs to the AICPA Employee Benefit Plan Audit Quality Center (EBPAQC). Members of the EBPAQC voluntarily adhere to higher standards of audit quality through their policies, procedures, and training related to the performance of benefit plan audits. The RFP should ask for a list of the industry-specific audit training that each one of the team members assigned to the audit has received.

The Request for Proposal (RFP) Process

An effective RFP will determine the quality of the respondents and will help reduce the time and effort expended in the overall RFP and selection process. In addition, the plan sponsor should provide audit firms with sufficient information about the nature of the plan and the engagement to allow them to make a meaningful and comprehensive proposal that addresses your specific needs and evaluation criteria.

The RFP should include:

1. The name of the plan as it appears on the Form 5500.
2. Details about the Plan such as:

Type of plan

• Plan year end
• Size of plan (number of participants, total assets)
• Name of the auditor’s principal contact with the plan during the RFP process
• Names of the service providers, as applicable: custodian(s), recordkeeper(s), investment advisor, third party administrator, ERISA attorney, actuary, trust arrangements (e.g., master trust investment arrangement)
• Relevant Plan Provisions: the employer contribution formula, eligibility criteria, whether the plan has automatic enrollment, and whether it passes the discrimination test, distribution, loan, and hardship provisions.
• Expected due dates for completion of each service to be rendered.
• The dates when the audit package and payroll report can be available.
• Objectives, expectations, and requirements of the audit engagement to be undertaken.

Scope of the engagement

Describe the services to be provided; the scope of the work and any special considerations, including:

• Number of years that should be covered by the proposal
• First year covered by the proposal
• Whether the audit is a full scope audit or a 103(a)(3)(C) audit (formerly limited scope audit) in accordance with DOL Regulation 29 CFR2520.103-8
• Types of investments held by the plan, whether there are any hard to value investments, and the respective custodians for each investment holding
• Were there any changes in service providers during the year?
• Whether any other services are expected of the CPA firm (such as preparation of Form 5500 or performance of payroll audits)
• Whether the financial statements and auditor’s report will be part of an 11-K filing
• Whether the CPA is expected to attend regular or special meetings with plan trustees, governance committees, or the plan administrator
• Description of any plan changes or significant issues not described above (for example, unique accounting circumstances, consolidations needed, and known areas of difficulty such as hard-to-value investments, discovery of fraud)

Requested Content for the Proposal

The RFP should include questions that address what is important to the plan sponsor, such as:

• The CPA Firm’s size, location, and history
• Whether the firm is a member of the AICPA Employee Benefit Plan Audit Quality Center
• Number of employee benefit plan (EBP) clients
• Number of similar type plan audits
• States in which the firm is licensed to practice
• Firm references — especially from similar type plans — and specific contact information
• Whether the firm has been the subject of any DOL findings or referrals, or any AICPA or State Society Ethics referrals
• Whether the firm has insurance coverage (errors & omissions, workers’ compensation, etc.)
• Information about the audit team that will be assigned to the audit
• Partner in charge of the CPA firm’s employee benefit plan audit practice
• Partner in charge of the audit
• Expected levels of staffing and supervision
• Prior EBP experience and training of the partner in charge and in-charge of the engagement and other key firm personnel pertinent to the engagement
• Details of industry-specific EBP Continuing Education attended by supervisors and above assigned to the team
• Other industry involvement
• Client retention statistics
• Turnover rate for EBP Personnel

Engagement information

• Audit approach
• A detailed fee schedule for each service to be rendered
• Reports to be issued
• Expected completion dates for each portion of the engagement
• Expected level of staff assigned to the engagement
• Biographies for the personnel assigned to the engagement
• Information that is expected to be provided by the plan to the CPA
• Fee structure for any additional services the plan sponsor may request

Proposal Evaluation and Auditor Selection

The following information should be considered during the proposal evaluation and selection process:

• Federal law requires that an auditor engaged for an employee benefit plan audit be licensed or certified as a public accountant by a State regulatory authority. You may wish to verify with the appropriate State regulatory authority that the provider holds a valid, up-to-date license or certificate to perform auditing services.
• Auditors of employee benefit plans should not have any financial interests in the plan or the plan sponsor that would affect their ability to render an objective, unbiased opinion about the financial condition of the plan.
• One of the most common reasons for deficient accountants’ reports is the failure of the auditor to perform tests in areas unique to employee benefit plan audits. The more EBP-specific continuing professional education and experience that an auditor has with employee benefit plan audits, the more familiar the auditor will be with benefit plan practices and operations, as well as the special auditing issues unique to, and rules that apply to such plans.

The technical evaluation should provide a systematic framework for selecting an auditor based on the requirements contained in the RFP. The review of the auditors’ proposals and qualifications should be thorough, uniform, and well documented. Verify that the firm has addressed all items mentioned in your RFP. For those proposals that are complete and have addressed all relevant areas. Consider performing separate evaluations of the proposals based on technical criteria and price. While the price for the work to be performed is a factor in the selection process, the lowest price does not guarantee a quality audit. As mentioned previously, only after the technical evaluation is complete and the qualified respondents have been identified should the plan sponsor review the prices offered by the qualified respondents. Consider whether you want the finalists to present their proposals.

RFP Audit Example Template

The following RFP template contains many of the RFP criteria outlined above. It can be tailored to fit the needs of the plan sponsor conducting an evaluation of audit candidates. As always, we hope you find the tool useful in your quest for a new auditor that fits your needs.