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How Effective Are Your Internal Controls?
July 30, 2019

When was the last time you closely examined your retirement plan’s internal controls? If you’re not sure, or if the answer is “a while ago,” then now is a good time to take a close look at these controls.

Strong internal controls are essential not only to ensure that your retirement plan remains in compliance with all regulatory requirements and plan provisions, but also to guard against fraud. Additionally, they can help you maintain your plan’s tax-favored status, help make you eligible for the IRS’ Self-Correction Program, and limit the possibility that the IRS will perform an expanded audit on your plan.

Steps to Follow

The American Institute of Certified Public Accountants (AICPA) lists a number of steps plan sponsors should follow in the evaluation of a plan’s internal controls, including the following:

  1. Establish control objectives. Internal control objectives might include things like making sure plan investments are measured at fair value and ensuring that participant contributions meet required amounts.
  2. Evaluate control risks. You want to make sure that adequate internal controls are in place in the areas that pose the greatest risk for your plan.
  3. Use COSO. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control—Integrated Framework is widely recognized as a comprehensive framework for establishing appropriate internal controls.
  4. Communicate your controls. Once established, document and communicate the internal controls to all employees who must follow them.
  5. Monitor your controls. The design and operation of your plan’s internal controls should be monitored and reviewed on a periodic basis. You should check to make sure they are in place and operating as intended and that any problems or exceptions are identified and promptly resolved.

Objectives and Internal Controls

Following are examples of common objectives for retirement plan internal controls and the specific controls that can address them:

Objective: Ensuring that investment transactions are recorded accurately and on time

Internal controls:

  • Timely review of reports submitted by trustees, asset custodians, and investment managers
  • Regular reconciliation of detailed subsidiary records to trust reports
  • Regular comparison of control totals from participant records to control totals from trust reports

Objective: Ensuring that investment transactions are initiated in accordance with established investment policies

Internal controls:

  • Documentation of the investment criteria or objectives in the plan instrument or plan committee minutes
  • Authorization of the ability to execute transactions in the plan instrument or plan committee minutes
  • Review of investment transactions for adherence to investment guidelines by the investment committee

Objective: Ensuring protection of investment assets from loss or misappropriation

Internal controls:

  • Segregation of responsibility for investment decisions and transactions from the custodian
  • Review of the financial stability of institutions holding participant investments
  • Control of documents in a limited access and fireproof area
  • Limiting access to investment records on a need-to-know basis

Objective:

Ensuring that the amount of employer and participant contributions meets authorized or required amounts

Internal controls:

  • Description of contribution requirements or limitations in the plan instrument or collective bargaining agreement
  • Determination of contributions using an approved eligibility list
  • Use of an actuary to make periodic valuations and reports

Objective:

Timely recording of contributions in the appropriate amount and time

Internal controls:

  • Comparison of plan sponsor payroll records with contribution calculations
  • Reconciliation of contribution forms to the cash receipts ledger and bank deposits
  • Confirmation that procedures are in place to ensure that participant contributions are remitted to the trust in accordance with DOL guidelines

It’s Your Responsibility

As the plan sponsor, you are ultimately responsible for establishing and maintaining appropriate internal controls. Your auditor may be able to help you determine which controls are appropriate and necessary for your plan.

Please contact us if you have more questions about retirement plan internal controls.

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