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The Importance Of A Fiduciary Audit File

The Importance Of A Fiduciary Audit File
Maintaining a Fiduciary Audit File is a MUST if you're planning on sponsoring an ERISA covered plan such as a 401(k).

The decision to offer a 401(k) plan comes with many positives. From mitigating taxes, to employee recruitment and retention, as well as high retirement contribution limits - there are a multitude of reasons companies choose to offer these plans as a workplace benefit. Yet offering a plan also comes with fiduciary responsibility. According to Section 404 of ERISA Law a plan administrator MUST:

  1. Act solely in the interest of the participants and their beneficiaries
  2. Act for the exclusive purpose of providing benefits to participants and beneficiaries
  3. Pay only reasonable expenses of the plan
  4. Carry out their duties with the care, skill, prudence, and diligence of a prudent person familiar with the matter

When one considers that ERISA is a 530+ page document written in legalese, these 4 “musts” become a tall order. Failure to follow these requirements can (and does) lead to significant penalties. In fact, 67% of DOL audits resulted in monetary results and/or corrective action totaling $3.4 billion in 2020.

The DOL’s literature makes it clear that they are much more concerned with the “process” a Plan Administrator follows compared to a company achieving perfect results. As with so many other things, keeping clear, concise records is of the utmost importance when it comes to documenting the steps one has taken regarding their 401(k) plan. Staying organized will help one ensure they are checking all the appropriate boxes, providing the best overall plan, and keeping themselves out of hot water if they are ever audited. To simplify this process, one can (and should) establish a Fiduciary Audit File.

What is a Fiduciary Audit File?

A Fiduciary Audit File, is an organized system where one can keep track of all their important documents pertaining to their 401(k) plan. In a nutshell, a fiduciary audit file can help you:

  • Stay organized in the event of an audit
  • Respond to inquiries by plan participants
  • Establish reporting policies and procedures
  • Document compliance with established policies and procedures
  • Keep an organized record of Committee Meetings, Committee Charters, Investment Policy Statements, and Investment Lineup Changes

The good news with a Fiduciary Audit File is that it doesn’t have to be complicated or difficult to maintain. While one can get super detailed and extensive when putting these together, it’s oftentimes overkill to try and get every single document in one place. What I would encourage instead is to store the main documents consistently and focus on the niche ones as needed. Let’s get into the documents one should have on file, what these documents are and why they are important. We’ll then finish by discussing a couple of different ways to store them effectively.

Fiduciary Audit File Main Documents

So what are the main documents every Fiduciary Audit File should have? I’m glad you asked. Let’s break these documents down by name and what they cover.

  1. Plan Document  - Your plan document includes information such as eligibility requirements, employer contributions, vesting, deferrals, safe harbor contributions and many other details regarding your plan. This document is the most detailed document regarding your plan and how it is organized.
  2. Summary Plan Description - Your Summary Plan Description (SPD) describes in plain language the features of your plan. It is a summarized version of the Plan Document designed to be easier to understand when read by participants.
  3. Plan Highlights - Your Plan Highlights is a summary of your SPD. It lists the most important features in of your plan in a very concise format
  4. Fee Disclosures - Your Fee Disclosure details all of the fees associated with your plan and the investments in your plan. There are two main disclosures you’ll want to file. One is your participant level fees (known as a 404(a)) and the other is your service provider fees (408(b)(2))
  5. QDIA Notice- Your Qualified Default Investment Alternative (QDIA) Notice outlines which investments are selected for your employees when they make contributions without making an investment election. This document will highlight the funds name and associated fees.
  6. 3(21) or 3(38) Agreement - These documents outline the relationship your company has with the Investment Advisor you are choosing to work with. They outline who is overseeing investment selection and monitoring as well as document if your Investment Advisor is acting in the role of a fiduciary with discretionary trading authority on your plan assets.
  7. Auto Enrollment Notice - This document summarizes information on enrollment, deferrals, vesting, and distributions.

The above documents are all documents you should receive upon setting up your plan. A best practice is to store them under their own folder as “Plan Documents” so that you can easily access them if they are needed or requested by a participant.

Other documents you should include in your Fiduciary Audit File are listed below:

  1. Meeting Minutes - The importance of these documents CANNOT be overstated. Remember, the DOL’s view is that if it wasn't documented, then it didn’t happen.
  2. Training Documents Covered - When you offer training of any sort, it is a good habit to save a copy of these documents in your fiduciary audit file
  3. Investment Policy Statements - While not required by ERISA, having an Investment Policy Statement (IPS) on file is a best practice. This document covers how your company oversees investment selection and monitoring. Keep in mind that it is better to NOT have an IPS then to have an IPS which you don’t follow.
  4. Committee Charters - These documents outline who is responsible for what and who is considered a fiduciary on the plan. They help ensure that no party is surprised by finding out they are acting in the capacity of a fiduciary (and thus subject to ERISA Law) and unaware of it.

There are many other documents that one can save in their Fiduciary Audit File, however if you’re storing the ones above you’re off to a great start. Let’s finish up with ways that one can actually store these documents.

Storing in the cloud:

My personal favorite is to store these documents in the cloud. This ensures that one can access them from anywhere at any time.  Whether you use Google, Microsoft, or some other cloud based storage system, having them here is a great way to store needed documents.

Physical storage:

While not as accessible as the cloud, having physical documents is also acceptable. If you’re going to go this route, maintaining an organized file system is a MUST!

Whatever you decide when it comes to storage, keeping things organized is imperative. With our clients, we organize everything by date and with clear titles. For example, for our initial fiduciary training, we’ll create a folder in the cloud with the date it was covered and the easy to find title of “Initial Fiduciary Training.” For any training/educational overviews we host, we’ll do the same thing. This allows our Plan Administrators the ability to easily and rapidly find what is needed without having to spend a ton of time searching in an unorganized mix.
If you’re setting up a 401(k), keeping it organized can be a big task. Yet it’s not one you want to skimp on. If you’re looking for an organization to partner with to help keep things in line and following best practices, feel free to email us at: Questions@LetsWinWithMoney.com