Testing income allocation for individual participant account

[Guest Lin]

401K audit - how can one test the income allocation in selected individual participant accounts?

The schedule of individual account balances only has the market value (MV) and number of shares on both 1/1/08 and 12/31/08, the total contribution $ amount and shares for the year, and dividend $ and shares for the year, by participant and by the invested fund.

The net asset value on the plan level at year end agreed to Form 5500. But how can I ensure the income allocation is correct at the participant level?

We have not been doing this test, but a recent webnar training mentioned it. Anyone out there has been testing the income allocation at participant level?

Any input will be appreciated. Thanks!

[Jim Chad]

I work for a CPA firm and 10 years ago we had a balance forward plan and 2 of the Participants wanted to know if I was doing things right. So they tried to figure this out for their own account. Here are a few suggestions.

Ask the recordkeeper what exact formula is being used. This may simplify your job.

Ask what time frame is being used. For example: many plans are quarterly. Compared to annual, this will make a difference for some people.

Maybe pick 5 people and if they all come out the same within a half percent, call it good. IMNTBHO

[Bill Presson]

If the report shows shares, it's probably not a balance forward plan, it's probably daily.

You would need to see complete transaction history for whatever participant you choose to test. The only way the gain/loss is correct would be for the number of shares purchase to be correct. Obviously, you need to check dividends, if applicable.

[Guest Lin]

Thanks for the suggestion!

After considering available data and the materiality, we decided to only test the reasonableness of the individual participant account's balance by tracing the calculated share prices to published source on both 1/1 and 12/31. Since the appreciation/depreciation of assets is not individually allocated to individual account but directly derived from the Trustee's recordkeeping system, we decided to rely on the Trustee's SAS 70 Type 2 report for the control over income allocation.