Strong Internal Controls for Plan Assets
Safeguarding Your Employee Benefit Plan: Internal Controls Over Contributions and Distributions
Robust internal controls are the most effective defense against errors and fraud in employee benefit plan transactions, ensuring that assets are protected, distributions are accurate, and the plan remains compliant with fiduciary responsibilities. Establishing a formal, documented framework of controls — especially those governing the flow of money into and out of the plan — is a non-negotiable duty for plan fiduciaries. These controls build the necessary safeguards to protect participant savings and mitigate significant regulatory and financial risks.
Key Takeaways
What is the best way to prevent fraud in a benefit plan?
The best way to prevent fraud is by establishing strong internal controls, particularly the segregation of duties, so no single person controls a full financial process.
How often should plan records be reconciled to bank statements?
Plan records should be reconciled to bank statements regularly, ideally on a monthly basis, to ensure accuracy and quickly identify discrepancies.
Why is documentation important for plan distributions?
Proper documentation and authorization of distributions are necessary to verify participant eligibility, ensure compliance, and create an auditable transaction trail.
The Foundation of Asset Protection
The primary role of strong internal controls is to minimize the risk of errors and fraud in plan transactions. Every transaction related to contributions (money flowing in) and distributions (money flowing out) presents a potential vulnerability. Without clearly defined procedures, unauthorized or incorrect transfers can easily occur, leading to significant financial losses for the plan and its participants. Controls act as a preventive measure, stopping problems before they start, rather than relying on detective measures to find mistakes after the fact.
Effective controls also ensure that all transactions are processed according to the plan document’s terms and relevant regulations, preventing costly non-compliance. These safeguards are not merely administrative burdens; they are fundamental components of fiduciary excellence, demonstrating a commitment to prudent management and the protection of plan assets.
Segregation of Duties
One of the most essential internal controls is the segregation of duties, which ensures that no single individual has complete control over a financial process from start to finish. This principle prevents the possibility of a single employee perpetrating and concealing fraud or errors. For example, the person responsible for initiating plan distributions should not also be the person responsible for approving them or reconciling the related bank accounts.
Implementing this separation creates a system of checks and balances where the work of one person is automatically verified by another. This division of labor should apply across the entire transaction lifecycle:
- Authorization: Approving the transaction (e.g., approving a loan or hardship withdrawal).
- Recording: Entering the transaction data into the plan’s accounting records.
- Custody: Handling the physical assets or checks (often by a third-party trustee).
- Reconciliation: Comparing the internal records to external statements.
By separating these functions, the risk of collusion or oversight is significantly reduced, strengthening the overall control environment.
“Robust internal controls are the most effective defense against errors and fraud in employee benefit plan transactions.”
Ensuring Accuracy Through Reconciliation and Authorization
Accuracy in plan accounting hinges on regular reconciliations of plan records to bank statements, which are critical for timely identification of discrepancies. A reconciliation process involves comparing the plan’s internal ledger balances for contributions, distributions, and investments against the balances reported by the plan’s bank or trustee. This process should occur monthly and must be performed by an individual who does not have custody of the assets or the authority to record transactions. Unexplained variances (such as an unrecorded distribution or a contribution amount that doesn’t match) are red flags that demand immediate investigation, often indicating a processing error or, potentially, a fraudulent transaction.
Equally important is the control over access to funds, which is managed through proper authorization and documentation of contributions and distributions. Every transaction must be initiated and approved by the appropriate personnel as defined by the plan’s governance structure. For contributions, documentation includes employee payroll records and timely remittance reports, ensuring the correct amounts are posted to participant accounts. For distributions, controls must verify eligibility (e.g., reaching retirement age or qualifying for hardship), require proper participant signatures, and mandate the appropriate tax withholding documentation (such as W-4P forms) before any money is disbursed. Comprehensive documentation creates an auditable trail for every movement of money.
Maintaining Control Integrity Through Review
An internal control system is not static; it requires ongoing attention to remain effective. Periodic reviews of internal controls help identify and address potential weaknesses that can emerge due to staff turnover, changes in plan design, or updates to administrative software. Fiduciaries should schedule formal, documented reviews at least annually. These reviews should assess whether the established controls are still relevant, whether they are being performed consistently by staff, and whether the controls adequately address new or emerging risks.
This continuous monitoring is vital. A control that was effective five years ago may be obsolete today. For example, a change in payroll systems might unintentionally bypass a former control point for contribution remittances. By proactively auditing the control environment, fiduciaries demonstrate prudence and ensure that the protective mechanisms over plan assets are always operating at peak effectiveness, ultimately securing the retirement savings of all plan participants.
Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.
Questions?
Jackie leverages her experience in audit, review, and compilation services across multiple industries to serve clients, including those requiring specialized employee benefit plan audits. She applies her audit skills to a variety of engagements, encompassing many of the firm’s client engagements since joining the firm in 2019, ensuring compliance and financial accuracy across diverse sectors, including employee benefit plans.