The intention of this blog post is to provide Plan sponsors with useful tips and documentation considerations to ensure a plan transfer of assets is successful in meeting the Employee Retirement Income Security Act of 1974 (ERISA), Department of Labor (DOL), and American Institute of Certified Public Accountants (AICPA) requirements and regulations needed to achieve an unqualified (or clean) audit opinion.
What is a 401(k) Plan Transfer? A plan transfer is the transition of, a portion or all, assets from one plan to another qualified plan. Plan transfers are very common and can result from transactions such as company mergers, acquisitions, divestitures, or other similar events. They can also result from an employer sponsoring multiple plans, with provisions that either require or permit participants to transfer the benefits they have accumulated in a prior plan to another plan due to events such as employment status changes (for example, changing from hourly to salaried or changing operating companies). It is important to note that plan transfers are different than rollover contributions or benefit payments as these transactions may be permitted or required by the provisions of the plan or may be a nonrecurring event that is typically included as a plan amendment, for example, the result of a merger or spinoff. These types of transactions are ordinarily managed by the Plan sponsor and do not require participant approval or action.
Why does it matter? If your defined contribution plan requires an annual ERISA audit, it will be critical to maintain appropriate documentation over the transfer of assets that occurred during the Plan year being audited to ensure your auditor can perform the applicable procedures over this transaction.
What documentation is needed? An auditor will need to: (1) obtain an understanding of the plan transfer, (2) perform procedures over the transfer of assets at the participant-level, and (3) perform procedures over the transfer of assets at the plan-level. Plan management is responsible for obtaining, retaining, and providing this support to the auditor. It is recommended that management considers the aforementioned areas when undergoing a plan transfer to ensure all relevant information for the audit will be readily available.
Understanding the Plan Transfer: It is important for plan management and the plan auditor to understand the nature of the transaction that resulted in the plan transfer. The following may be relevant for plan management and the plan auditor to understand the transfer:
- The experience, knowledge, and authority of the individual(s) responsible for overseeing, monitoring, and approving the transfer
- The service providers involved in the transfer (for example, trustee or custodian, and recordkeeper, for each plan)
- Whether external specialists or outside consultants were used by the plan (for example, an ERISA attorney or valuation specialist)
- Whether management has controls in place to monitor the accuracy and completeness of the transfer, both at the plan and participant levels
- How the assets were transferred (for example, liquidated or transferred in-kind) and recorded by each trustee or custodian
- The effective date of the transfer and the specific terms and conditions of the transaction
- The date(s) the assets physically transferred from one trustee or custodian to the other trustee or custodian
- The dates each trustee or custodian recorded the transfer of assets in their records
- The date each recordkeeper recorded the transfer of participants’ information
- How the applicable participants were identified and verified
- Whether management reconciled the transfer of assets and participant information recorded in the prior plan’s records with the successor plan’s records
In addition to answering any audit inquiries related to the items above, it will be beneficial to provide your auditor with any newsletters or other applicable information that was provided to Plan participants prior to the transfer taking place. For example, these communications may indicate when the transfer will be taking place, what the blackout period timeframe will be, and any changes in plan provisions or investment options as a result of the transition. It will also be necessary to provide any plan amendments related to the transfer. Plan amendments and merger documentation typically indicate the effective date of the transaction and the appropriate period to record the plan transfer.
Participant-Level Information: It is best practice for an auditor to perform procedures over a sample of participant accounts before and after the transfer took place. There are many different procedures that can be performed in order to accomplish this portion of testing. However, the most common procedures include confirmation with participants directly or tracing account balances from previous plan recordkeeper reports to the new plan recordkeeper reports.
When undergoing a plan transfer, it will be important to retain reports of participant account balances from the prior and new Plan recordkeepers. These reports should include all participants with an account balance in the plan. Ultimately, the sum of all account balances should equal the total amount of plan assets being transferred (less any processing fees). Although this documentation is necessary for auditors to perform their procedures, management should also be using these reports to reconcile the transfer of assets and participant information to ensure that the transfer is taking place in a complete and accurate manner.
An example of a reconciliation for a participant account may look similar to the following:
For the purposes of the example below, the scenario of the plan transfer is a recordkeeper transition from Fidelity to Empower. John Smith and Diane Rose were plan participants that were involved in the plan transfer of assets.
* Any differences identified during the reconciliation of participant accounts should be investigated further by management and will require a conversation with the plan recordkeepers and additional support in regard to the variance to ensure the participant accounts are being transferred completely and accurately.
Plan-Level Information: Similar to the participant-level information, the plan auditor will likely require plan-level reports from the previous and new Plan recordkeepers. These reports will be used to verify that the total amount of assets transferred from the previous plan agree to the records in the new plan. For an ERISA Section 103(a)(3(C) audit, certified trust statements from the previous recordkeeper are the most sufficient report that can be retained and used for this reconciliation. It is recommended that plan management performs a reconciliation of the total amount of assets transferred in or out of the plan by comparing the transferred asset amounts between the prior plan recordkeeper and new plan recordkeeper. Any differences identified during the reconciliation of the net assets transferred should be investigated further by management and will require a conversation with the plan recordkeepers and additional support in regard to the variance to ensure the plan assets are being transferred completely and accurately.
The Financial Reporting Executive Committee of the AICPA and CIMA (FinREC) recommends that the net assets transferred into or out of the plan be recorded on the statement of changes in net assets available for benefits after the net increase or decrease for the period. This amount will ultimately agree to the amount stated at line 2l on the Schedule H of the Form 5500.
Thank you for reading!