The 401(k) Audit CPA Success Show: Episode 21
401(k) Plan audits are their unique specialization, with very technical terminology and governing rules that change constantly. As a 401(k) Plan Administrator, you need to make sure you're staying compliant with the current regulations and that you get the value of what you pay for according to your business needs. In this episode, our Director of Accounting Jamie Nau, sits down with our Director of Auditing Kim Moore, to discuss 401(k) audit pricing and what you can expect from the pricing process.
Jamie Nau: Hello, everybody. Welcome to today's podcast. We're joined once again by our Audit Director, Kim Moore to talk about everybody's favorite issue, pricing. I'm excited to dive into this topic. Kim, I'm just going to start off with a really quick question. So, there are some areas in life. I know everybody's a little bit different, where you really look to save extra money. One of those areas for me is cereal. If I'm at the grocery store and I'm looking at Lucky Charms and the generic Lucky Charms are half the price, I'll probably just buy the generic ones. So, does audit fall into this category? In saving terms Is this an area where you're always looking for the biggest issue?
Kim Moore: I'm totally with you. I always compare potato chips. You know, you can go to a variety of stores and get different, you know, fancy potato chips, but for a lot of us, it's just, I just want the generic good old fashioned, plain old potato chips. And I don't want to pay a lot of money for fancy extra ones. I'm glad you brought that up. Cause it's something that we run across a lot. The potential clients that call us that they just found out they need an audit in the first place. They're shocked because they didn't know that was even an option. And then they don't know what it is. And then they think it's going to be a few bucks and they find out it's thousands of dollars. And so, then they're really picking themselves off the floor. So, to most folks, they look at this, it's a required item that they need per ERISA requirements, per DOL requirements. So, no real value to me as a person that is running a 401k plan other than I need to do it per compliance requirements. We all have a lot of compliance things we must adhere to that we may not really like or not agree with. It's kind of like one of those death and taxes things. You got to do it. And so, they're really looking at it like they are alike. One audit firm is the same as another. They're all giving me this thing called an audit, whatever it is. So, I'm going to find somebody who can do this and then I'm going to go by price. So, whoever's the cheapest one. The reason why that's kind of a bad idea is that these are very technical audits. Not only is it an audit, which is a unique thing that's different than what you might hire an accountant to do say prepare your tax form or you know, look at your books, or run payroll for you. Things like that. Audit is its own unique specialization. Within audit, benefit plan auditing is again, another layer down of specialization. They are very technical audits. There's a, and we've talked a lot in previous podcasts about how the rules are changing all the time. You need to make sure you're up with the current regulations. So just going to any firm that says, sure, I'd be happy to do that audit for you. I'm going to be the cheapest one around. That doesn't guarantee that they don't know what they're doing. In a lot of cases those are folks that are not up to date with the most current regulations. They're not up to date with the most current accounting rules. Ultimately, and a lot of folks don't understand this either. You're hiring an auditor to do the audit and you expect the auditor to have knowledge. I mean, that's why you're hiring them. And because they're independent, that's kind of the key concept there. But at the end of the day, the regulation specify that it's the plan sponsor's responsibility to make sure the plan is compliant. That includes making sure the Form 5500 is filed on time and that it's accurate, complete, et cetera, along with the audit report. So they're really holding the plan sponsor responsible for making sure the audit gets done. It's on time. It's complete. Everything's been done. That's supposed to be done. If the DOL would come in and audit the plan, because they do audit the auditors, but if they audit that and find that it's lacking in some reason, they're going to come back to the plan sponsor and hold them responsible, not the auditor. That's the way the regulation works So, you know, a long-winded answer to your question, but price matters. And it doesn't mean that a good firm that knows what they're doing, can't charge a reasonable rate. So just because it's cheaper doesn't mean it's not any good. But it also shouldn't be the one sole thing that you're determining who you're going to use as your auditor.
Jamie Nau:Yeah. I think that that's kind of like the buyer's life cycle, right? Like you find out you need something, so then you look at it and a lot of times you're often shocked with the price. So, then you're like okay, I'm going to look for the cheapest option. And then you kind of get over that sticker shock and are like, should I really be looking for the cheapest options when looking for the best options? So, then you kind of have to figure it out what makes the best option. I know we're going to get into that in a couple of minutes here, before we go down that path let's talk a little bit about the type of fees that are charged. I know accountants have lots of different ways to charge fees. What do you see out there?
Kim Moore:Yeah, and this has been changing. We here at Summit use fixed fee pricing for just about everything that we do. And there's a lot of reasons for that. It is easier for us. It's easier to bill when everybody knows what the pricing is going to be upfront, but we find that a lot of the clients like it because they know ahead of time the price they're going to pay. It's not an estimate. It's not a guess. So, if you end up needing these audits year after year, it's easier to budget for if you have a general sense of how much it's going to cost. The other ways that we see people do this is just strictly an hourly rate. You know, so-and-so is going to work on your audit. Their hourly rate is blank and however long it takes them to do the audit is how much it's going to cost. If you've been using that firm for a long time, it probably doesn't vary a lot. So there it may not be that much different. But if you're looking for an audit firm for the first time, or you're looking to maybe shop around and see what else is out there, that kind of comparison gets very difficult because a lot of audit firms aren't going to do exactly the same thing. I might do the audit a little quicker than somebody else, or I might take a little longer. If it's just a per hour rate that can fluctuate a lot. A lot of firms also will do some upfront discussion with the client to find out what kind types of transactions they have. Then from that, they will give you a number. Sometime it's just an estimate. The cost is going to vary from here to here, you know, and that could be a range. Some of them will say, well my estimate is so much, but if I see these things happening, which could happen as I really dig into things, then it's going to increase by you know, by so much or you may not know how much. That's why we like the fixed fee because, and we're going to get into this in a little bit more depth here, but our fixed fee, we have a base price that an audit will never really go below unless there's something unusual about the particular client. Then from there, we're going to add on to that depending on the answers to a few questions. Again, we're going to get into, and that will determine your fixed fee. As long as nothing changes throughout the audit that causes those answers to be incorrect. You know, if you're telling us one thing and it turns out that's not true, it's really something else. Of course we would have to adjust the fee. But as long as all of those things, you've checked those out and that's actually the answers to the questions and that's how it goes throughout the audit. That will be the price. Pricing the payment part of it that's simple as well. We require, in a regular audit 50% of the total fee that fixed fee, which is just a strict dollar amount. So, 50% of that amount upfront and 50% at the end when we give you the draft report. We also offer a scheduling discount at the beginning of the year. So, if you were to schedule with us today, we're in August now. You know, this wouldn't be applicable to you for this year, but if you would have us do the audit next year, at the beginning of the year in January, we offer a 10% discount on that full returning client fee as a discount for coming in and for scheduling early and allowing us to get going on your audit early. These audits, they range generally between around $9,000 - 12,000 as a good rule of thumb.
Jamie Nau:Getting back to the hourly rate. I think anytime where something that's regulatory, that's a very difficult place to get into when it comes to hourly rates. I think a lot of people hear hourly rate and think okay. I can save time by having short phone calls or doing these other couple of things. But when it comes to something that's regulatory like an audit is like, there's a lot of requirements. There's a lot of things that we as auditors need to do. So you don't really have as much control in certain area as you think you would.
Kim Moore:That's exactly right, Jamie. You are not doing yourself a favor trying to go that route because you could just delay it, and that will cost you time because they're going to bill you for every time that they've try to contact you. It's just a big unknown. I mean, you really don't know how long it's going to take and you're going to get yourself in a bad spot cutting corners. You are going to be up against deadline that will result in costly fees. We've talked about this on the blog, on the podcast as well, the fees for missing those deadlines can get into the $10,000 to $100,000 from the DOL. And if you're trying to save money cutting corners on steps, the auditor will have a hard time giving you what you need and then you may not be able to fight it. So, it could end up costing you a lot more money in the end.
Jamie Nau: I'm a big fan of the fixed fee when it comes to stuff like this. Knowing what you're paying.
Kim Moore: Yeah. I think for most financial folks, you know, risk is a big part of any decision that you're making like this. I think fixed fees; it just takes a lot of the risk out of it. You know, they're going to deliver a product. You know it's going to be a quality product and you know what you're going to pay. And I think from the client's standpoint too, they always wonder if it's just strictly a time element. Why did it take you five hours to do that? You should have been able to do it in an hour. Now I'm going to pay all that extra money. So it just leads to a lot of uncomfortable conversations.
Jamie Nau: To that point, one point to take away from this podcast is look for those fixed fee arrangements and try to avoid hourly ones, because hourly is very difficult path to walk down. So, let’s talk about our billing and estimating process and what we look at.
Kim Moore: Yeah. As I mentioned, we have a base fee that's currently $9,000, obviously, subject to change, and then we add on costs or not depending on how folks answer questions. First thing is the number of participants. So, the number of people that are eligible to participates in the plan. You might have a plan that has, you know, 500 people that can be in the plan, but only 20 are enrolled. That's a much different scenario than 500 people and only 490 are enrolled in the plan. I think you're going to find that most auditors, if you're calling around and asking for pricing, that's one thing that's probably going to be consistent. Everybody's going to want to know that because it drives all the activity that may or may not occur in a plan. It's going to be a common thing auditors need to need to know.
Jamie Nau: Going back to what we mentioned earlier, number one, if you're looking for an auditor and they give you a price and they never ask this question, then they might not know what they're doing.
Kim Moore: Yes, It might lead you down the path of thinking especially if it's an hourly, if they're not asking how many are actually participating, they may totally underestimate how much it's going to cost. So even if they give you a good ballpark range, if they're not driving down into the details, that range might not be correct. The next thing that I wanted to talk about is first-year audit. So, if you just stop and think about any type of service arrangement that you might get involved in, the first time you're working with a provider for a service, they've got to get to know you. They've got to know your processes. They've got to know your setup. They've got to set up things on their end because obviously they wouldn't have done any work for you before. There's a lot of things in a first-time audit that are very similar. So, we charge in our case, we charge an extra thousand dollars if it's the first time audit for us. So maybe they've never been audited at all, or they've been audited before, but by someone else, we still charge that fee. There's a lot of reasons for that. You know, we've got to understand the plan. We've got to understand their service provider, their reporting what's available, what isn't. We've got to understand the processes and the control. So like who does what with the plan? We've got to set up all of our work papers, you know, which sounds simple, but it actually takes a good bit of time. So that's all a part of why we're charging the thousand dollars, which that kind of probably makes sense to everybody. They would figure well, you know, you've never seen it before. So of course, you got to get in there and get an understanding of it all. Something unique though for benefit plan audits. If you've had other kinds of audits this will be different. Audit standards require, especially on the benefit plan side, is that we are required per audit standards to go in and look at a participant level at the beginning balance. Now that doesn't mean we go back and audit 20 years prior information. The procedures are going to vary based on the situation. But every firm is required to do that work and that can take quite a lot of time. Depending on how long the plan's been around, and the changes that they've made at the plan level throughout the years. So every situation is going to be a little different, but that's why that thousand dollars is there. Primarily for that reason, but also for the other things that I've mentioned.
Jamie Nau:I think the key is, the first year of going through an audit with a new auditor is a lot of for the auditor, and for you as the customer. So, when you are signing up with a new auditor, I would look at it as a long-term relationship because you're not going to want to sign a new auditor every year, because you're going to have to answer the same questions. They're going to have to understand your risks. They're going to have to understand your investments, your transaction, and in the long run probably costs you more. So, I think when you are interviewing auditors, think of this as a long-term relationship even though you are only signing a one-year engagement.
Kim Moore: That’s a very good point, Jamie. And we look at it that way as well. You know, when we sign someone new, we are looking at it to be a long-term relationship, unless for some reason the plan ends or something, but you know, we want to retain them. It's better for us for a lot of reasons. Financial being one, but also, you know, we gain a familiarity, and we don't have to repeat the work that I talked about doing in the first-year audit. So, yeah, definitely. You don't want to be changing auditors every year. I mean if we go back to price shopping. This isn't something that every year you want to go out and see, who can I save a thousand dollars or $500 off this? Because you're going to eat up that savings in all the time and effort, you're going to have to put in. Definitely not a good idea. One other thing I'll mention just kind of quickly, this comes up sometimes, but not often. You know, we've got to get reporting on all kinds of things related to the audit. All the activity that happened, and then where the assets stand at the end of the year. So anytime you're making changes to the plan in the middle of a year. For example, if I'm hired to audit the 2020 plan year in the middle of 2020 and you go from ADP to Paychex. You may be thinking, what does that have to do with 401k? Well, it has a lot to do with it. The payroll, obviously you're withholding from people's compensation, which then should end up in their 401k plan accounts. So, every time you're making a change to a payroll provider that's going to cause us more work. So we have, in our case, a $750 additional fee if that happens. Not a lot of money, but it is necessary because it does cause us extra work if you're moving plans as well. There is extra work because we've got to verify that transfers are complete. We must do testing around that. So there's a little bit of an extra charge for that. I always like to point that out because we get questions from our current clients asking, is there anything I should let you know in between audits? And this would be one because if you're thinking of changing a providers or supplier it may be necessary. So, something you want to communicate to your auditor. The other major thing that I wanted to bring which will cause a difference in pricing. And currently the difference in pricing is $1,500 on this particular item for us. So, we're doing this podcast in August of 2021. If you're listening to this next year, or later on, the verbiage is going to change a little bit here. Currently we're in the audit requirements where we have something called a limited scope and a full scope audit. That's going to change to a very complicated terminology. It's going to go to a SAS 103 83C type audit or a non 103 83C audit. So, the limited scope will become a 103 83C. The full scope will become the non 103 83C audit. Just wanted to point that out in case you're seeing something on other websites or other podcasts. So, forgetting that terminology difference ERISA, which is of course a congressional act that passed back in the seventies, has a provision in it that actually created the need for the audit in the first place. But it also has a provision that allows if you’re an asset holder. So now this would be the entity that's physically holding the assets can provide a valid asset certification. I'm going to get into that a little bit more here in a minute. But the auditor is allowed to rely on that certification for the ending asset balance. The gain loss on those assets throughout the year, and especially at year end and then the pricing on the audits, kind of on the transactions as they go through the year which can be a pretty significant difference in work compared to being able to rely on that versus not rely on it. So that's the reason for the change, that difference in pricing. So, if you're listening to this and you think I might need an audit, it will probably be a limited scope, but you need to be aware of this because it's not always true. I mentioned that asset certification, there are specific rules around that it. They have to be able to provide the certification. That has to be included. It has to be provided by the asset holder company and has to be actually physically signed. I mean, an email is not sufficient as to be signed by someone. It has to be someone from the company in a position that can provide that. So not just anybody can give it to you. If you have a local rep, they're not, it's not appropriate for them to be signing either. It has to be somebody in a position of authority. The biggest hurdle though, is ERISA only allows this for entities that are regulated, and they're routinely audited on their own. Generally, that's going to be an insurance company regulated at the state level or a bank or trust company, which are regulated at the federal level. And they are audited by separate auditors on separate schedules, and you know, different criteria. But they're audited on a regular basis. So, my suggestion in this space, if you're not sure about any of this, ask your provider. That's the best way. They can look at it and say, yeah, that would work. Or no, this is going to be a problem because XYZ.
Jamie Nau: That is not a surprise you are going want to find later on. You're not going to want to get halfway through the audit and find out, oh, actually you guys aren't limited scope. That change will ad time to the audit and put you at risk of not meeting deadline. I think it’s crazy that they're changing the name from something simple, like a limited scope audit to something with numbers.
All: Laughing [in audible]
Kim Moore: I know it's very confusing. But that's what it's going to be at. There will be no more limited scope. That terminology will go away. The process will be exactly the same. None of that's going to change. One last thing I wanted to mention in this space is that another thing to be careful of is the certification may not cover all the assets. So we've seen examples where a plan has their assets with a provider. And, you know, I guess I could say like a Fidelity or Schwab, but they also have a bank account over here that is also related to the plan. A life insurance policy or policies that certain participants have. Those kinds of things tend to not be covered by the certification. So that's something you'd want to bring to your auditor's attention upfront again, another pricing and delay of time issue. If they are wrapping up and they look at the Form 5500, and there's something else showing up on there, that can cause a big delay. So again, talk to your auditor upfront about the assets that you have and where they are.
Jamie Nau: I think when it comes to these audits is to have the auditor know what they are going into. So be upfront in the in the quoting process. You know, they're asking those questions. So, Kim, any final thoughts? I'm sure there's a couple other things that people need to think about when it comes to pricing if you want to hit on those real quick.
Kim Moore: The key is, as mentioned before when you start calling around for auditors it to make some notes of all of the things that we talked about, so you know what answers to look for. It'll be easier and quicker for you. The pricing should be transparent. Then make sure you know what's going on with your plan so you can discuss the fixed fees we talked about earlier.
Jamie Nau: Yeah. There's a lot of questions go into it, and auditors really need to be thoughtful about what it takes. Great. Well, thanks again, Kim. This is a great topic. I know I learned a lot today. I appreciate you coming on.
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