Switching your 401(k) plan providers can be a complicated affair. Changing to a new recordkeeper, custodian or payroll provider can have a direct impact on your 401(k) plan audit, requiring thorough planning to keep both current and upcoming audits moving smoothly along. Careful documentation and clear communication with your 401(k) plan auditor can help your audit stay on track, but following the best practices below can prevent avoidable issues in the first place.
Changing Recordkeepers
Your recordkeeper is responsible for administering your 401(k) plan. They manage daily activities such as processing distributions, allocating contributions to participant accounts or initiating loan forms. Sometimes, your recordkeeper and custodian, who manages the plan assets, will be the same entity. Fidelity is an example.
Keep in mind that changing your recordkeeper during the plan year will require your 401(k) auditor to test your internal controls for your previous provider and your current one. This is to ensure that if someone took a loan or a distribution with your first recordkeeper, your controls worked as intended. If you made the change as of January 1 or December 31, all transactions may have occurred under one or the other, but that’s a very rare circumstance.
Participant Data Transfers
Your auditor will also need to test the transfer of participant data to ensure all funds were correctly transferred to the proper account and category, e.g. Roth, employer or pre-tax. Since you’ll have financial statement data coming from two different sources, your auditor will need to reconcile and combine them. If there’s any sort of lag between asset transfers, it may cause gain/loss issues.
On some occasions, differences in reporting between recordkeepers can create complexity and confusion – for instance, if one recordkeeper includes loans in their information while the other recordkeeper lists them separately. Defaulted loans may also be cleared out when they’re transferred, which can create issues with reconciliation. These issues aren’t worst-case scenarios, but they are time-consuming.
As the transfer progresses, it’s recommended that you verify everything’s working correctly. Ultimately, the plan administrator is responsible for making sure every participant is accounted for and has the same number of assets allotted to them under their new recordkeeper that they had with their old one, with the exception of any gain/loss changes that occurred during the transfer. Don’t wait for your auditor to discover any discrepancies; document actions you took to fix any issues you discovered.
If your previous setup worked well with your first provider, try to keep it as intact as possible as you transfer to your new provider to help keep things simple. Review all your links. Perhaps you have an automatic link between your payroll provider and your recordkeeper that will need to be reset. Take this time to also review your controls for your current processes; they’ll more than likely need to be changed or at least re-examined.
Working with Your Previous Recordkeeper
Historically, when you’re moving away from one provider to another, your old provider may become less responsive once you stop paying. Remember that audits happen a year in arrears. As far as your old recordkeeper is concerned, they’re done with you. You’ll still need to reach out to them for information, but don’t be surprised if they don’t prioritize their response. You may be able to access what you need on their website, but it can sometimes be difficult to get access to that information that requires their assistance, which can cause delays.
Changing Custodians
Custodians are the entity that actually hold the plan assets. In the case of Fidelity, they may also be your recordkeeper, but you don’t typically work with your custodian on a daily basis. In some cases, either your recordkeeper is sold or decides to work with a different custodial group, so you may not have been the one to decide to make the change. Regardless, from an audit standpoint, the same double testing procedure that occurs with changing recordkeepers will have to take place here, too. Your controls will also be examined by your auditor to make sure they understand how they worked both before and after the change.
Custodian Certifications
Be aware that you receive an annual certification from your custodian. If you change custodians, you’ll receive two certifications to cover both parts of the year. The beginning and end dates on the certifications should be the time when those entities actually held the assets. There may be an overlap, but the Department of Labor (DOL) has been clear that they don’t want to see two certifications that cover the entire year. There are some exceptions, such as when assets are held by your previous custodian after all other assets were transferred, but this isn’t something that happens with every plan. Issues with certification, while fixable, can delay the audit.
Keep in mind that while assets are being moved from point A to point B, there is going to be a blackout period where no one will be able to access them. Your previous custodian will liquidate the assets to turn them into cash. They then transfer the cash and the new custodian uses it to purchase assets. The DOL has strict rules for communicating information like this to your participants, so be sure to cover it with employees. Bear in mind that blackouts can be lengthy, and the market won’t wait for the transfer, likely impacting the plan’s assets.
Changing Payroll Providers
Payroll is where many transactions, including participant contribution withholdings, which are the most important transactions according to the DOL, take place. Funds must be withheld correctly and transferred in a timely manner, as soon as administratively feasible.
While moving from one provider to another may sound easy, it’s just not that simple when it comes to payroll. There are many different levels where it can go wrong, even outside the realm of 401(k)s. One way to help see you through the changes is to think about how your payroll ran before the transition. How many different types of pay do you have? Bonuses, commissions, hourly, salary, bereavement, paid time off: there are many types of pay that all have their own codes. You’ll also have a set of codes for deductions and tax withholdings. Some codes are taxable while others aren’t; some are deferrable for 401(k) purposes, some aren’t. All of this increases the complexity of payroll. Unless you’re completely changing your payroll structure, ensure you’re capturing information directly from your previous provider to send to your new one. Take inventory before the transfer so you’ll have a list to work from once you’ve moved to your new provider.
Running Payroll Tests
Do test runs in your new environment. If you’re allowed to set it up in a test area, test a fake payroll with your new payroll provider to see if everything matches up. Perform a thorough review, almost an audit, of your first payroll process. Once you put the payroll process in place, the only way to catch a mistake is if a participant or your auditor catches it later on, which isn’t ideal. Commit to a deep dive; don’t just count the number of checks. Look into each person and each code to make sure it’s all set up correctly. Don’t just do this for 401(k) related activity; do this for taxes and everything else.
Just as before, you’ll need to reset links between your recordkeeper or insurance provider and your payroll system. Be sure to reset these as quickly as you can. Remember that deductions will also be reset, but contribution limits aren’t, so don’t let participants accidentally overcontribute to their 401(k) plan; it could create problems for them later as they go to file their taxes.
Questions to Ask Your Auditor
Don’t forget that your 401(k) plan auditor will be working a year behind. Before switching payroll providers, try to reach out to your auditor and ask what they’ll need from your legacy payroll provider. If this is your first 401(k) plan audit, talk to your auditor about your timeline. You may need information from two years prior to your first audit for beginning balance testing that you no longer have access to.
Overall, your best strategy is to document every decision or issue you’ve resolved and communicate all necessary information to both your auditor and your plan participants. Talk to both your new providers and your old ones to make sure you’ve got every piece of information you’ll need for your audit. There’s no such thing as too much information for your auditor at the end of the day.
For more information on how our 401(k) audit team can help, request a free consultation below to discuss your unique 401(k) audit needs.
