Is Your 401(k) Ready For A DOL Audit?

401(k) plans are a vital part of employee benefits, offering a path to retirement security. However, they come with significant fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA). A DOL audit can strike at any time, and unpreparedness could lead to hefty fines, lawsuits, or personal liability for fiduciaries. The solution? A proactive, comprehensive approach to compliance.

So, what typically triggers a DOL audit? Common red flags include participant complaints about high fees or poor investment performance, often filed directly with the DOL. Inconsistent or late Form 5500 filings—required annual reports on plan operations—can also draw scrutiny, with the DOL noting in 2022 that 30% of audits stemmed from filing errors. Plans with rapid growth, mergers, or a history of compliance issues are often targeted, as are those flagged by data analytics for unusual patterns, like low participation rates or excessive administrative costs. A 2021 DOL report highlighted that plans with fees 0.5% above industry averages were 40% more likely to be audited. Understanding these triggers can help you prioritize your preparation efforts.

In this guide, we’ll dive deep into a checklist to ensure your 401(k) is audit-ready, backed by data and studies, and enriched with practical fixes. Plus, we’ll offer a free resource to elevate your plan beyond compliance.

Point 1: The Importance of a Retirement Committee—Your Foundation for Success

Why It Matters:
It all starts with The Committee. A Retirement Committee is the backbone of fiduciary oversight for your 401(k) plan, ensuring that every decision aligns with ERISA standards and participant interests. The committee is responsible for:

• Decision-Making: Selecting investments, service providers, and plan features.
• Compliance: Staying updated on ERISA and DOL regulations.
• Oversight: Monitoring fees, investments, and participant education efforts.

A 2019 Defined Contribution Institutional Investment Association (DCIIA) study found that plans with a formal committee had 50% lower fees and 35% better investment diversification. Moreover, plans with active committees were 45% less likely to face DOL audit penalties, according to a 2022 PSCA survey. A strong committee sets the tone for compliance, ensuring the following points in this checklist are executed effectively.

Substantive Fixes

1. Form a Diverse Team: Build a committee with HR, finance, and legal experts to cover all perspectives. Assign specific roles, such as “fee monitor” or “investment reviewer,” to ensure accountability.
2. Meet Quarterly: Hold 30-minute meetings to review fees, investment performance, and compliance. Use a consistent agenda—e.g., start with a fee benchmark update, then review investment performance, and end with education initiatives.
3. Standardize Records: Adopt a meeting minutes template (e.g., date, attendees, decisions, rationale) to streamline documentation. This ensures the committee’s actions are transparent and defensible in an audit.
4. Set the Tone: As a committee, commit to following the steps in this checklist—documentation, fee transparency, education, and fiduciary audits. A proactive committee drives these efforts, positioning your plan for success.

A well-run committee doesn’t just reduce audit risk—it enhances the plan’s overall quality, benefiting participants and the organization.

Point 2: Documentation—Prove Your Decisions

Why It Matters:
With a strong committee in place, documentation becomes the next critical step. ERISA Section 404 mandates that fiduciaries act prudently and in participants’ best interests, which hinges on meticulous records. The DOL expects to see:

• Investment Policy Statements (IPS): Criteria for selecting and monitoring investments. While not a hard requirement, they are definitely considered a best practice.
• Meeting Minutes: Records of fiduciary discussions and decisions (which your committee should already be producing).
• Fee Benchmarking Reports: Proof that fees are reasonable.
• Service Provider Agreements: Contracts with vendors like recordkeepers or advisors.

A 2022 DOL report revealed that 65% of audited plans had documentation gaps, resulting in average fines of $50,000 per violation. Poor records don’t just risk penalties—they undermine participant trust and weaken your defense in an audit.

Substantive Fixes

1. Centralize Records: Create a “Fiduciary Audit File” (digital or physical) to store all plan documents. Use a cloud-based platform like Google Drive with restricted access for security.
2. Detail Decisions: For instance, if the committee retains an investment option, document its performance metrics, cost, and alignment with the IPS. If fees rise, note the justification or negotiation attempts.
3. Set a Review Cadence: Allocate 10-15 minutes during each committee meeting to update records, ensuring no decision goes undocumented.

The Plan Sponsor Council of America (PSCA) found in 2021 that plans with systematic documentation were 40% less likely to incur DOL penalties. A committee that prioritizes this step sets a strong foundation for audit readiness.

Point 3: Fee Transparency—Don’t Get Caught with Hidden Costs

Why It Matters:
Your committee should lead the charge on fee transparency, a key DOL focus since the 2012 ERISA Section 408(b)(2) fee disclosure rules. Disclosures must detail:

• Administrative Fees: Costs for recordkeeping, legal, or compliance services.
• Investment Fees: Expense ratios, trading costs, and more.
• Individual Fees: Charges for loans or withdrawals.

Excessive fees are a red flag. In 2023, the DOL recovered $1.4 billion for plans due to fee violations, with some fiduciaries held personally liable. A Center for Retirement Research study estimates that high fees can erode retirement savings by up to 20% over 30 years.

Substantive Fixes

1. Audit Disclosures Annually: Task the committee with verifying that all service providers submit detailed 408(b)(2) breakdowns. Cross-check against DOL guidelines to ensure completeness.
2. Benchmark Aggressively: Use tools like our Benchmarking Report or the DOL’s 401(k) Fee Disclosure Tool to compare fees against peers. Aim for costs below the industry median.
3. Optimize Costs: If benchmarking reveals high fees, have the committee negotiate with providers or switch to lower-cost options like index funds (often 0.03%-0.10% in fees) or collective investment trusts (CITs).

A 2021 NEPC survey showed that annual fee benchmarking saved plans an average of 0.15% in costs, boosting long-term participant outcomes. A committee that prioritizes fee transparency keeps your plan compliant and cost-effective.

Point 4: Participant Education—Prove You’re Supporting Your Employees

Why It Matters
A proactive committee ensures participants understand their 401(k) options, a DOL expectation. Weak education efforts can lower participation and lead to poor investment choices. In 2021, 40% of audited plans faced DOL scrutiny for inadequate education, with fines averaging $25,000. Conversely, the Employee Benefit Research Institute (EBRI) found that educated participants were 30% more likely to boost contributions and 25% more likely to diversify investments.Substantive Fixes

1. Launch Webinars: Have the committee oversee quarterly 15-30 minute sessions on topics like maximizing employer matches or understanding expense ratios. Record them for on-demand access.
2. Simplify Materials: Distribute concise guides—e.g., a one-pager on “Why Fees Matter” or “How to Read Your Statement.”
3. Personalize Support: Offer one-on-one consultations with your plan’s advisor, targeting employees within 5-10 years of retirement.
4. Track Efforts: Ensure the committee maintains logs of webinar attendance, materials shared, and participant feedback to show the DOL your commitment.

A 2020 Journal of Pension Economics and Finance study linked robust education to a 20% higher participation rate and 15% larger account balances. A committee that champions education strengthens your audit readiness.

Point 5: Maintaining a Fiduciary Audit Checklist

Why It Matters
A fiduciary audit checklist, overseen by your committee, is a proactive tool to stay compliant and spot weaknesses. It should include:

• Documentation completeness.
• Fee reasonableness and disclosure updates.
• Education program effectiveness.
• Investment performance and alignment with the IPS.

A 2022 Callan survey showed that plans using a checklist were 60% less likely to face audit-related compliance issues.

Substantive Fixes

1. Start with a Template: Use a DOL-provided checklist or one from industry groups like the American Retirement Association.
2. Tailor It: Have the committee add items specific to your plan, like reviewing a unique investment option or a recent provider change.
3. Review Annually: Integrate the checklist into the committee’s year-end process, assigning tasks to members for accountability.

For a sample, check out the DOL’s Fiduciary Toolkit or similar resources. A committee that uses a checklist ensures continuous improvement, keeping your plan audit-ready.

Get Audit-Ready with Our Free Benchmarking Report

With a strong committee leading the way, you’re well-positioned for a DOL audit—but why stop there? At Link Financial Advisory, we offer a free Employee Sponsored Plan Benchmarking Report. Scored on a 0-100 scale across six key areas—using ERISA law, DOL standards, and industry best practices—it highlights your plan’s strengths and gaps. You’ll receive actionable insights and a dedicated advisor to implement improvements, ensuring your 401(k) excels for your employees and organization. Ready to strengthen your plan? Start by benchmarking your plan or contacting us today to get your questions answered.