Consider this. You are opening a new dealership and, along with it, an operating bank account. Your bank is custodian of the funds. Your dealership personnel make deposits and write checks. Most likely you also have an outside CPA firm that goes through your books at least once a year. Even though you have a bank that holds your money and a CPA that probably looks at your cash to some degree each year, you establish internal controls for daily operations. You require two check signers, documentation to support checks being issued, and reconciliations to the bank statements. In other words, you implement internal controls to prevent or quickly detect mistakes and misuse or diversion of funds.
As a 401K sponsor the Department of Labor (DOL), the IRS and your plan participants expect no less. Once you decide to open a retirement plan, you are expected to protect the assets of the participants and adhere to the rules and guidelines that you have represented to them through your plan document. One way to accomplish this is to establish internal controls within your organization pertaining to your plan.
So, you ask, what internal controls should I be implementing?
A good first step is to know what parties are involved with your plan (the trustee, the third party administrator, the record keeper and the CPA firm if the plan is required to be audited). You should know what role each party plays. For example, what parties are involved in approving a participant loan? More importantly you should know what roles they do not play and that you would be responsible to fill. If a problem arises down the road saying “I thought my trustee was handling that.” is not a good defense. You should know for sure. After all, the ultimate responsibility lies with you.
Here are some other internal control procedures that a plan sponsor is expected to implement:
Compare deferral elections with amounts deducted from employee wages.
Verify that new participants are indeed eligible.
Verify that payroll deductions are deposited timely into the participant accounts.
Verify eligibility and proper approval for plan distributions and loans to participants.
Compare amounts being deducted and amounts credited to the participant’s account.
These are just a few. More information may be found at www.irs.gov/Retirement-Plans or contact Bishop Norris or John Gibbs at vgncpa.com.