Why your 401(k) needs an objective auditor

Some corporate accountants perform a critical function called a retirement plan audit. Once a year, they prepare a report showing how well — or how poorly — a company’s 401(k) plan is being run.

|
LM Otero/AP/File
In this Sept. 24, 2013 photo, freshly-cut stacks of $100 bills make their way down the line at the Bureau of Engraving and Printing Western Currency Facility in Fort Worth, Texas.

Some corporate accountants perform a critical function called a retirement plan audit. Once a year, they prepare a report showing how well — or how poorly — a company’s 401(k) plan is being run. This is an opportunity to uncover any problems or conflicts of interest, so it’s essential that the auditors be objective. That’s why these audits are typically done externally, meaning the accountants who perform them are not employees of the company.

If you have money in a 401(k), however, it’s important to understand that while having an outsider do the audit is a good start, it’s not enough by itself to guarantee objectivity.

The results of a retirement plan audit become public record. Anyone can delve into your 401(k) and see who’s doing what for the plan, how much they’re getting paid, what the investments are and how much money is in each one. Even small plans, which are not required to have an audit, file a “short form” version of this report, which also becomes public record.

If employees are unhappy about the plan and discover that the CEO’s country club pal is the plan advisor, or that the company’s bank also runs the 401(k), or any other questionable arrangement, they might want to look at the fees being paid by the plan. If the fees are high, employees have every right — I’d argue it’s an obligation — to question those fees.

This is where the accounting firm comes in. If the auditors do a good job, their reports and tax filings can uncover potential problems in your plan — soft-dollar (commission) revenue sharing, kickbacks to brokers, affiliated investments, high servicing fees and a variety of similar schemes that create a drag on investment performance or leave your company exposed to liability. This is why audit reports are public: so interested parties can examine them. It’s not guaranteed that the audit will uncover all flaws, but at least you have a fighting chance when the auditor is objective.

But what happens when the auditors are not objective or have a relationship with your plan advisor? When the accounting firm is affiliated with a wealth management or brokerage firm that also manages the 401(k) plan, things can get ugly quickly.

To be fair, a growing number of accounting firms are insisting on autonomy, electing not to do audit work if they also have wealth management divisions, or splitting off the business unit that represents a conflict of interests. And many small- to mid-sized accounting firms outsource certain parts of the audit to firms that can conduct more complete advisory examinations of 401(k) plans.

But when the accountant and the plan advisor work for the same firm, you essentially have auditors overseeing their own work. Imagine having to disclose improper kickbacks involving a broker who is just down the hall from you and whom you see at the annual holiday party.

Such circumstances can generate a dizzying array of potential conflicts. A broker’s primary objective is selling investments or insurance to individuals outside of 401(k) plans. This is because, on average, they stand to make a lot more money on those products and services.

Reconciling these two roles — advising the 401(k) plan and selling products to individuals — is difficult. When the same person or firm attempts to fill both roles, distinguishing between them becomes nearly impossible. Yet many wealth management and brokerage firms still oversee 401(k) plans. When the firm auditing these arrangements is also affiliated with the wealth management firm, you likely lose any real chance of accountability.

To make matters worse, retirement plan advisors are often asked to assess the reasonableness of the fees the plan pays to its service providers, including the accountants. This is called “benchmarking.” But an advisor who is affiliated with the accountant may have trouble calling attention to high accounting fees or a lack of service. Or what if the advisor’s own compensation has been misreported? Who would catch that?

In short, when you have accountants effectively auditing their own work and financial advisors examining the fees being paid to their colleagues, the system designed to protect you is dismantled.

If you have a brokerage firm handling your 401(k), you shouldn’t be surprised if you continue to experience high fees and low accountability. And if your accountant also happens to be affiliated with the firm, the checks and balances are virtually eliminated. At the very least, it creates the appearance of a conflict of interest that should be addressed.

This article also appears on NasdaqLearn more about Jonathan on NerdWallet’s Ask an Advisor.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Why your 401(k) needs an objective auditor
Read this article in
https://www.csmonitor.com/Business/Saving-Money/2015/0923/Why-your-401-k-needs-an-objective-auditor
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe