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401k Trust Statement


Guest Amanda Davis

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Guest Amanda Davis

It has been suggested by our auditors that we perform monthly reconciliations of our trust statements in greater detail than we currently do.

Our plan has daily valuation. Recordkeeper and Trustee both Merrill Lynch. For the monthly trust statements, I generally use them to verify that our contributions have posted to the trust and to track distributions and loans. I don't really reconcile much beyond that.

What is the norm for monthly reconciliation on a plan with a daily val? What kinds of things do you look for? Any helpful hints for me?

Thanks!

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So, in essence, the auditors are asking you to do their job for them? Aren't they relying on Merrill's SAS70 report to "buy off" on the trust and daily valuation recordkeeping systems? If so, then I don't understand the purpose of the request, other than the auditors attempt at pushing their work onto you.

As a recordkeeper, it sounds to me like you are already reconciling monthly as you are tracking all monies moving in and out of the plan. But, if they push, all you have to do now is "plug" Merrill's earnings for the month into your data. If it ties then you are balanced and done. If it doesn't, then track which pieces of activity haven't occured on the trust side yet and move those into next month's activity. Do it piece by piece, starting on the last day of the month and working backwards.

The reason I say use Merrill's earnings, instead of wasting your time trying to calculate your own, is that at the end of the day the trust's earnings are the only ones that the auditors will use in their reports. Otherwise they would have to do a full scope audit. So, no matter what earnings you use they will question them if they don't tie exactly to the Trust...may as well use the trust to begin with and save yourself the effort.

Anybody else see things differently?

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Guest Amanda Davis

Thanks for your response.

This year, our auditor took the SAS70 and then asked Merrill to prove that the recordkeeping system to trust reconciliation was accurate!! My rep's hair almost lit on fire. Our auditor claimed that "in the era of Enron" this is how things are done.

I agree with your suggestions -- it was my first thought to do exactly what you said. I just couldn't understand why an excel spreadsheet which is an exact replica of the trust statement, but in a different format will do the job. Talk about spinning your wheels.

Am I to understand that your "reconciliation" of the trust statement is similar to my current practice -- just monitor contribs and distributions?

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Well, not exactly...I am a TPA and have been dealing with auditors for years and have found the best way to get them in and out of my hair (thereby avoiding the exhorbitant fees they charge) was to figure out exactly what they could rely on and then modify my numbers to match theirs. So, I was just giving you the easiest way to appease the auditor. And yes, it is spinning your wheels...

Unfortunately it's only going to get worse for you if you have a Big Four auditor. They've been increasingly pushing work back onto recordkeepers and administrators for the last few years.

From a consultants point of view, I would talk to the partner on the account and find out exactly why it is that you have to replicate work already done by the trustee/recordkeeper who has a satisfactory SAS70. In my opinion, the "post-enron" world answer is not a viable response.

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Not so sure about the contention this is the auditor's job (I am not an auditor).

Are they essentially suggesting that you balance your checkbook? Remember, it is the plan's accounts, for which the plan is responsible. The auditor's job is to review the work of the trustee and recordkeeper, and the plan sponsor.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I agree Pax, but it's my contention that they are already reviewing the work of the recordkeeper/trustee or relying on the accuracy of their data via a satisfactory SAS70 report.

Asking the plan administrator, who has absolutely no access to the data being used, to calculate the earnings (remember, she is already verifying activity; they want her to balance to the trust and the only missing piece is earnings) is a bit unreasonable. The best she could possibly do, and they should know this, would be to plug in the earnings provided by the recordkeeper/trustee. If they are using her data to verify anything, then I question the validity of their work.

What it boils down to is that this is a daily valued plan and the trust and recordkeepers systems balance daily. If they aren't going to rely on the SAS70 reports that, in all likelihood, their own firm prepared then what is the point? Why make the plan sponser go through the extra work? A traditional plan I can understand this request, but a daily plan?

I would love to hear an auditors opinion on this.

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It could be that your auditor is just trying to pass on information about practices recommended by the Department of Labor. Advisory Councils of the Department of Labor have made this same suggestion. See http://www.dol.gov/pwba/adcoun/3dparty.htm.

It includes the following comments: "No mandatory reconciliation of participant records and trust records. There is no current requirement that there be a reconciliation of participant records and trust records. … Barbara Uberti (Wilmington Trust) noted ..."if the bank account and book got reconciled every month, you would know if something were missing". Arguably, it would be the essence of imprudence for someone to never balance one's checkbook, yet qualified plans are not required to do so. Advisory Council Member Marilee P. Lau, a member of the Advisory Council and an Assurance Officer with KPMG Peat Marwick LLP, stated at a full Board Meeting that such reconciliation should be done monthly, otherwise it would be, "like reconciling your bank account once a year. You've got to close the bank account in order to be able to do that."… Mr. Greg Barton, who also appeared for Vanguard, said that "What you'd really be looking at for the small mom-and-pop, 20-employee [establishment], is a requirement to provide an annual statement, and at the bottom of that statement would be certification under penalty of perjury by the plan administrator that the assets were reconciled". Ian Dingwall (PWBA) also suggested improving the summary annual report, "the things that they actually get in their hands". …Consequently, it is our recommendation to mandate reconciliation of participant records and trust records and require a certification by the plan administrator that the reconciliation was done in the summary annual report. We submit that the Secretary is specifically empowered under ERISA sections 103(B)(5) and 104(a)(2) to require such a certification."

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All good and well Katherine, and I whole-heartedly agree that it should be done monthly for all traditional plans. Although, the expense in doing so would be onerous for most small business owners. However, we are talking about a daily valued plan, adminstrated and trusteed by the same company (Merrill Lynch). This plan, by design, is reconciled daily. In addition, Merrill already certifies that the trust balances are accurate on a monthly basis. They also, I would imagine, provide monthly plan and trust statements to the plan sponser. To me, this is reconciling...

It makes absolutely no sense why, in this case, the auditor is making the client do this on a monthly basis, when, by design, the plan is reconciled daily. It's the same as the auditor requesting the plan sponser do a adp test when the plan already satisfies ADP through the use of a 3% safe harbor contribution.

It's my opinion that the auditors are simply blanket applying a rule passed on by the higher-ups to all plans without stopping to verify that it is even applicable to specific plans. They do it all the time (and I'm certain every TPA has their audit horror stories which typically involve an auditor fresh out of college with minimal training).

I've seen many an instance for which a traditional plan was not reconciled, even annually. I believe it is those plans to which the DOL was referring, not a daily valued plan.

Maybe I'm being stubborn here, but I still don't see the validity of the request.

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Yes. That is what I was saying -- that they have a laundry list of "good ideas" that they pass on to everyone -- and that this idea doesn't necessarily apply to this plan.

But I disagree that a "daily valued" plan is automatically reconciled daily. The purpose of the reconciliation is to identify deposits or withdrawals to the trust that have not yet been posted to the participants' accounts (or vice versa). Are you aware of the difference between "trade" date and "settlement" date? In a daily valued plan, the contributions might be posted to the participants account on the trade date (at that day's value). But the trade may not be settled in the trust on that date. So there will be discrepancies. There are similar discrepancies with loans going in and out and with distributions. The end of year balance in the trust rarely equals the end of year balance on the participant statements.

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Now that I think about it, I bet that one of the reasons that the auditors want monthly reconciliations is to help them find the late deposits of contributions (those that miss the 15 day rule). There is a schedule of prohibited transactions attached to the audited financials. That schedule will include late deposits. In the post-Enron environment, there is increased pressure on auditors to verify that all prohibited transactions are reported.

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Yep. The process probably has lots of other benefits also. For example, when we balance assets for DB plans, it is not uncommon to find a contribution or benefit payment was credited to the DB plan instead of the DC plan. Not a major problem, but one that is easily missed unless you are paying attention.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I am an auditor, and agree that a lot of auditors who don't have the experience they should. One thing I find pertinent to add is that I have a client with ML, daily valued etc. Somehow they manage to maintain negative cash in a particular plan (not something I've seen on my other plans that use ML).

Perhaps a monthly reconciliation would have identified this oddity in the beginning rather than two years after it arose.

I agree whole heartedly with bank reconciliation analogy. Finally, I would also like to point out that the auditor cannot "make" the client do anything. We can recommend stuff. Sometimes that stuff may be unreasonable, but it may be the only way to be certain that material issues are identified. Then, when something goes wrong, we can say "well we told you do this, and you didn't. Had you done this, the problem would have been avoided." Multi-million dollar claim settled uneventfully out of court by writing a short letter recommending a reconciliation.

It's important to remember that a firm can be ruined (Andersen who?) if things go wrong and we "should have" caught the mistake. Even if people lie cheat and steal, we're still expected to find everything.

Austin Powers, CPA, QPA, ERPA

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