Large Plan Filer requiring CPA audit finds solution with Payroll Provider plan

[Brenda Wren]

We recently reviewed a 401(k) safe harbor match plan for possible takeover. The plan sponsor was disenchanted with her current TPA for being unresponsive and unwilling to "hold her hand". They employ about 400 employees, have about 120 eligibles and about 30 participating. The first thing we noted was that the plan was very close to an audit....a very big surprise to the client as an audit will likely add $5,000 - $7,500 to their annual costs.....a lot for a little tiny plan with only $300,000 and 30 active participants.

She found that her payroll provider could offer her a very flexible plan with a pretty good investment lineup for reasonable TPA fees that INCLUDED the audit!

Anyone have an experience with this type of bundled competition? Can clients really get basically a free audit by using a payroll provider plan?

[jpod]

One of the first questions a good auditor might ask is "why do only 30 employees out of 120 eligible elect to participate in a safe harbor plan?" Sounds fishy to me. Is the notice being distributed to everyone to whom it should be distributed?

[Brenda Wren]

Thanks for your reply jpod; I believe there may be a language or cultural barrier, but that's not the issue. Even if everyone participated, the bundled provider is including audit services at no extra charge. Admin services are quoted at about $1,000 plus $40 a head. Investments are offered at less than 1% asset charge and include lifecyle and risk-based model portfolios.

[MSN]

How would the provider support their position as an independent auditor if they were also receiving compensation from the plan for other services (TPA, Recordkeeping, etc...)?

[masteff]

One thing is that the separate fees being paid now are covered by an umbrella fee. It's not that the audit is free, it's that it's rolled up into the overall fee. Have to list out all the current costs and compare to the payroll services fees. Also the payrolll service has economy of scale and standardization on their side.

MSN - my experience is that it is an independent auditor, not owned/controlled by the payroll service. Might vary from service to service.

[austin3515]

As a former auditor, my opinion is that the DOL would look this over VERY closely. They would NOT be thrilled about the auditor and the auditee being "in bed together." For example, could the payroll company (who provides the auditor with X audit clients) coerce the auditor into overlooking its errors. Not only do CPA's have to be independent in fact, but they must also be PERCEIVED as independent. Therefore, they should walk away from situations which might be perceived as NOT independent. This seems to be one of those situations.

I know for a fact that a very large firm had a similar arrangement with a very large insurance company to "bundle the audit" and the whole operation was disbanded because the DOL was pretty unhappy with it.

What's more, its the fiduciary's responsibility to hire the auditor--so if the DOL rejects this arrangement, it is the fiduciary's problem (i.e., the fiduciary must go out and hire a new independent auditor). Sure, there might be a malpractice suit if the audit was rejected, but we all know how that works ($$$$$$$$$).

[PAL]

I agree with Mr. Powers! All of the bundled arrangements I knew about are now a thing of the past and even with those arrangements, the client was still the one to engage the audit team at a somewhat but not greatly reduced price. Based on the engagement letters I've seen recently, $5,000 - $7,500 is a very low for a 401(k) plan audit even if you are not using a big 4 so if they are going to get the audit for less then that, I'd say there is something weird going on (perhaps lots of soft dollars being moved around).

If they do take the deal, be warned: I was at a conference not to long ago and senior DOL representatives discussed how they believe that low fees for audits is a potentially good criteria to use when pulling plans for DOL review. They base that on their belief that if the fees are low, it is likely that not much work was done for the audit. I would not be surprised to see more audit fee information added to the 5500's sometime within the next few years.

PAL

[Belgarath]

This fits in with my all-encompassing theory on investments, TPA fees, whatever ---

TANSTAAFL (There Ain't No Such Thing As A Free Lunch)

[austin3515]

I can assure you there are no soft-dollar arrangements. That is an explicity prohibitted practice. Auditors CANNOT accept ANY referral fees, commissions, or soft-dollar kinds of money at all as fees from any audit client (even if the monies are not related to the audit itself). As an example, a CPA could not sell investments to an audit client. It's fee for service only. If any of this is going on, they would lose their license to practice (if caught). I just can't imagine any large audit firms are doing this. Certainly not the big 4, or the "big 100" for that matter (whoever they might be).

[BeanCounterBlues]

Agree w/ all previous posts. Regardless of soft dollars (which are clearly illegal) - the sheer knowledge by the CPA firm that "negative" audit findings could inhibit future referrals from this payroll service could cause an auditor to pass on something that otherwise wouldn't be passed on. If the payroll service is offering up the CPA to the plan then there's no independence perceived or otherwise. I'd run far away from this arrangement. I'm a CPA and a TPA; never done a benefits audit and never will but have unfortunately seen an auditor or two pass on things they shouldn't due to referral issues.

[austin3515]

Just to clarify, an auditor can GENERALLY accept referrals from anyone without concern. The question is whether they can compensate someone for those referrals - and they cannot.

I use the phrase GENERALLY because the example we're discussing here I agree would be the exception--this type of arrangement does not pass the independence smell test, even if there is no money exchanging hands.