Maintaining robust internal controls in your 401(k) plan is essential not only for compliance but for ensuring the accuracy of financial statements for your audit. From an auditor’s perspective, these controls provide a solid foundation of trust, allowing the audit process to be more efficient and less costly. Without effective controls, audits become time-consuming and expensive, as auditors are forced to double-check every detail. Key controls give auditors a baseline to work from and help ensure your plan operates smoothly, in accordance with regulations.
Maintain your plan’s integrity and compliance by reviewing and strengthening the critical controls listed below.
Ensure Segregation of Duties
One of the most effective controls from both a fraud prevention and operational standpoint is the segregation of duties. This control requires more than one person to be involved in key processes, making it much more difficult for fraud to be perpetrated or go unnoticed.
When multiple individuals are responsible for the same tasks, transparency is increased and the risk of fraud is reduced, as it becomes harder for any one person to cover up irregularities. Segregation of duties also allows employees to take vacations or handle personal emergencies without disrupting business processes. Beware if someone is the only one responsible for a certain task, such as payroll, but never takes time off or never allows others to review their work. This behavior should raise red flags because it signals a potential internal control issue.
Require Authorization or Approval
Ensure that all significant actions, such as distributions from a 401(k) plan, are authorized or approved by the appropriate parties in your plan. For example, a plan trustee might review all distributions to verify that the individuals receiving them are eligible and that the amounts are appropriate.
Controls can and should be layered together. Having a second person review transactions, whether for 401(k) distributions or payroll, adds an additional layer of security and ensures compliance with plan rules. This simple step helps prevent errors and ensures accountability within the plan.
Manage Reconciliation
Reconciliation verifies that financial activity aligns with the original source documents and that transactions were processed correctly. During an audit for your 401(k) plan, your auditor will trace a transaction from the employer or employee all the way to the plan’s recordkeeper to ensure that funds have been received and allocated to the correct participant accounts. This verifies that the process is accurate and has the necessary controls in place to function as designed.
Reconciliation is also essential for discovering missing or incomplete transactions. Sometimes, system glitches can interfere with fund transfers or payroll deferrals, and reconciling the records ensures these issues are identified and corrected. Importantly, this control should also involve segregation of duties—reconciliation should be done by someone other than the person who processes payroll to ensure independence in the review process.
Review Physical Security
Physical security extends to all sensitive information, whether physical or electronic. This includes maintaining proper storage for physical copies of payroll, HR information or checks, ensuring they are locked away and accessible only to authorized personnel.
Physical security also applies to electronic records. For example, if a payroll manager leaves their computer logged in and unattended, anyone could potentially access sensitive information. Even though the breach might be electronic, it still constitutes a lapse in physical security. Ensuring that only authorized personnel have access to these systems is vital for protecting confidential data.
Understand Automated Computer Systems
Many automated systems used in 401(k) plans have built-in controls that validate the information being entered. These controls ensure data consistency, such as requiring dates to be formatted in a specific way or preventing incomplete information from being submitted.
Users often aren’t even aware of these controls, but they play an essential role in maintaining the integrity of the data entered into the system. By ensuring that automated systems are properly configured and secure, plan sponsors can add another layer of protection against errors and unauthorized changes.
Key controls within a 401(k) plan are essential for ensuring compliance, preventing fraud, and maintaining the accuracy of financial statements. Segregation of duties, authorization protocols, reconciliation processes, physical security and automated system controls all work together to create a robust framework that auditors can rely on. By implementing and maintaining these controls, plan sponsors can reduce audit costs, streamline operations and protect both the plan and its participants.
If you need assistance in evaluating or strengthening the controls within your 401(k) plan, Anders can help. Contact us to learn more about how we can support your audit and compliance efforts.
