The 401(k) Audit CPA Success Show

Pricing For A 401k Audit

Episode Summary

One of the first questions you probably have about a 401k audit is “how much is this going to cost?” In this episode, Jamie Nau sits down with Kim Moore, the Summit CPA audit director to talk about the pricing you can expect in a 401k audit and what you can expect from the pricing process.

Episode Notes

Summit CPA Group has merged with Anders CPAs + Advisors! Visit our website to learn more about our 401(k) process and pricing: https://anderscpa.com/401k-audits/ 

“There are a lot of complexities in what drives the price for audits.”- Kim Moore 

 

The finer details in this episode:

 

Episode resources

Episode Transcription

Jamie Nau: Welcome to episode 4. Today, I'm joined once again by Kim Moore, our Audit Director, and are going to talk about everybody's favorite topic: pricing. So I know whenever I go to buy a something I am always curious about the price. I want to get that number out right away. So we're doing it early on here. We're going to talk about how to price for a 401(k) audit. So I'll start with the general question, Kim. If I'm looking for a 401(k) audit, and I talked to three auditors, what kind of variances should I expect? And what should I expect through the purchasing process yet?

Kim Moore: Thanks for having me on. Glad to be talking about this topic. And it is the first question usually that I get asked when people are calling in. or they're e-mailing, maybe they've seen us on the website. Quite literally the very first question is, so how much is this going to cost? And I'll get people that have already talked to other firms so they have a little bit of background. Sometimes I get people where I’m the very first person that they have talked to, and sometimes they are a little bit surprised how expensive the audits are. Our audits can run anywhere from 8000 dollars, on up. I would say the average for an audit, and again, we're going to talk a little bit about the differences in pricing, what drives the price, but it can be anywhere from around 7000, up to as much as 20 - 30 thousand, or more. Obviously, bigger plans, the ones that are the very big plans and very complex would be even more expensive than that. But for the average plans, and especially those where it's their first audit, so they're a medium sized company, they're going to run anywhere from that 6000 – 7000, on up. That's kind of the range of the price

Jamie Nau: And we focus on the medium sized plans, right?

Kim Moore:So we do, I mean, we will do any audit that really comes across that's a 401(k) audit. But generally, we get the types of people that either have just become eligible, or just requiring an audit. So that's, they've got 100 eligible participants, and you have to remember that 100 mark doesn't include just those people that are participating. So not those that are just in the plan deferring, but anybody who might be eligible to participate, but have chosen for whatever reason not to. But they get counted as well. It also includes anyone who's in the plan that's maybe left service with your company. So they might have worked for you before they had money in the plan. They left for whatever reason, gone with another employer, but they've left the money in the plan. They count as well. So once that combined number gets over 100, then you need an audit. We get a lot of those folks calling us for the first time. That's why I say they get a surprise, because I think they're expecting to hear it's going to be a few hundred dollars, maybe five hundred dollars, and when I tell them, well, the smallest base price is 8000, you know, I get a big pause or a sigh or something. They are very complex audits, and they do take a lot of time. So the price reflects that and the complexity of them as well.

Jamie Nau: Great. So one of the unique things we do at Summit is we're a fixed fee. So can you kind of explain the difference between a fixed fee audit, and a time of materials or an hourly audit?

Kim Moore: Sure, and you're absolutely right. We are very different, and I think one of the first folks that started down the fixed fee route in general, not just for auditing, but for all of our other services as well. It's a big component of who we are here at Summit is that we do fixed free pricing. For an audit, fixed fee pricing means that as I'm talking to a potential client, when they've called us, whether it's their first time or maybe they've had an audit before with another firm, we're going to go through a few different categories of questions with them. And each one of those is a component of our pricing model. We will go into the those different components here in a minute. But based on how they answer those questions, we're going to set the fixed fee at the beginning of the audit. And those are things that they should know, or they can find out fairly easily. They're not very involved items, they are pretty straightforward. And so once we've got the answers to those questions, that's going to set the price. And so they will know upfront, as an example, that their fee is going to be 8000 dollars. And that's the fee. We're not going to come in two or three weeks later and say, oh, now that we're into it and we dug in, we found out something. Now it’s not going to be 8000 dollars, it's going to be some bigger number. What you see with a lot of firms is that they'll do one of two things: they'll do some of those same questions and give you an estimate and say, we estimate it could be anywhere from this amount to a bigger amount. As we dig in and we find out more, than we're going to narrow it down. What you'll find is it's almost always going to be on the higher end. You know, they're never going to come in and say, oh, I guess what, you’re plan is simpler so it's going to be a smaller dollar. So it's probably going to go up from that original estimate that they give you. A lot of other firms will tell you, it's the first time we've seen your audit. We don't know you. We don't know your plan, and how complex it is. We have no idea. So we're going to bill you on an hourly rate, so every hour that we spend on your audit is going to be a certain dollar amount. Obviously, the longer they spend, the more it's going to be. And it is built in incentive for them to take longer, which obviously drives price up. But also then they're sticking in your hair for a long period of time. So there's kind of a double whammy with that. We find that a lot of folks really like the fixed fee aspect, because not only do they know upfront how much it's going to cost, they can budget for that. They can plan for that. It helps their cash flow. But they also, I think, can better understand what drives the price, because it's a fixed fee, and it has those individual components that helps them understand why it’s costing whatever the cost is going to be. But it also helps them plan for the future, because more than likely, they're going to need an audit next year and the year after that. And those factors, they don't apply just to us. They're going to apply to any firm that's doing an audit. So helping to understand those different factors helps them. If they know that they're going to grow, they know that they're planning on making a change to the plan. Those can all effect the audit complexity. So obviously it's going to affect the audit price as well. So I think they like both components of that.

Jamie Nau: Yes, definitely. It's nice to know what you're paying upfront, and that you're not going to have a sticker shock.

Kim Moore: Exactly. I mean, I think, you know, we can all relate to that. We've all went to buy something. We thought it was going to be a certain dollar amount. And it turns out it's much higher at the end. We all know how you feel with that. The other thing I'd say, just on the pricing standpoint, once the fee is set, there's two ways that we do the actual payment process. One, the majority of folks that are new to us, we're going to require 50 percent of whatever that set fee is upfront, and the remainder then isn't due until we deliver them the draft report. So it's very close to the end of the process. So they don't have to pay the whole thing upfront. It does again, give them a little bit of time to schedule out those payments. For those folks that we have done their audit before, and so we're starting over, we're going to be close to starting a new year here pretty soon. For those folks, they will get an engagement letter at the beginning of the year, because most of our plans are calendar year plans. So they will know at the beginning of the year that they need to have an audit of the previous year. [in audible] They will get an engagement letter. As part of that process of engaging us to do the next audit, we offer a discount for scheduling with us early. So if we did your audit last year, you'd like us to do it again for the following year, you want to schedule early in the year and you will pay the full amount upfront. So you're not going to be paying the 50/50. They're going to pay the full amount upfront. We offer a 10 percent discount off of the total. So they're going to pay the full 90 percent of whatever the fixed fee amount is. But that way, it allows them, again, to plan a little bit better and save a little bit of money. So 10 percent, you know, isn't a big amount, but every little bit helps I think.

Jamie Nau: And it’s nice to know when it's scheduled. Oftentimes you're trying to figure out when fieldwork is going to happen, and when the auditors are going to be working with us and asking questions. So it’s nice to get on the schedule for both sides.

Kim Moore: Exactly.

Jamie Nau: So you mentioned plan size, and you mentioned changes during the year. What else might make my audit a little bit more expensive than other audits?

Kim Moore: Yeah, we have a few factors. The way our pricing works with the fixed fee is we have a base price, and that base price is set based on being around that 100 employee mark—not exactly it can be slightly more than that. But if your plan is very large, so you have more than 500 people, again using those three components you talked about eligible, actually participating in plan, or have left your company, if that's more than 500 people, we're going to add a fee on to our base price because those plans are bigger. They tend to be more complex. The testing work that we have to do, we have to pick larger samples. So it's more work, and obviously takes more time. So that's one component, is just, how many eligible folks do you have? Another component that we have is if you've made a change. So if you've changed your payroll provider during this period that we're going to audit, we use a lot of payroll information. So if you've changed providers midyear, we have to have two payroll reports of everything. So two payroll reports, two W2, usually two sets of payroll data, I mean, it just goes on and on. Also, if you've changed your TPA or record keeper, there's going to be a transition period we have to test. There's going to be two sets of reports. We've got to work with two different folks from two different companies. So that again, introduces some additional work, additional time. Same thing with the custodian. If the custodian, the individual or company that's holding the assets, if that changes during the year, again, you're going to be taking all of your assets, plan assets, you're going to sell them. Transfer the cash over and then that new custodian is going to purchase a whole different grouping of investments. And so we've got to test that whole process. So it’s more work in all three cases. So we add a charge for the time to do that work. Another component that can get an additional charge is if you are a new client to Summit. So again, we've got that base price. So maybe it's your very first audit. You've never had an audit before, or maybe you've had an audit before but for whatever reason, you're just looking around to see what other auditors are out there. You talk to us. You like our process. In the process of setting the quote for that there's going to be an additional charge. On our end for a new client, regardless of whether it's the first audit. or an ongoing audit. but new to us, we have to set them up in our system. We have to, you know, assign staff. We have to get to know your particular plan. We have to get all of your initial documentation. So there is some additional work for us if it's a new client. So there's a charge for that. Again, reflective of the time just to get them setup, and to gain an understanding of the plan. And the last major element that can really apply to most plans, there are two different ways you can do the audit. Both are totally acceptable to the regulatory authorities, the Department of Labor, the IRS. On our end, from our regulatory authorities, the audit standards and the AICPA, both totally acceptable with all of those groups. One is called, limited scope, and the other is called, full scope. And that, by the way, that definition is going to change here over the next couple of years, but the methodology is going to be the same. It was set through the passage of ERISA back in the 70s, which created the need for the audits to begin with. Congress, who passed the act and put it together, recognized that a lot of the service providers, not all, but a lot of them that service these plans are large banks, their large insurance companies, their large investment companies like Fidelity as an example. And they get audited already by internal folks, by external folks, by other state or federal agencies. And so they felt like asking, especially the small plans, the small companies are sponsoring these plans, to pay for an audit. And they knew that it was going to be relatively expensive to have these plan audits done. To audit the very same things out of these providers that they're already being audited, that they felt like that was probably putting a burden on the smaller plan providers. So they put into the law these two options. If your provider is one of those groups I mentioned, large bank, large insurance company, large investment company, and they fall into the requirements that they're having these audits done, and they're willing to provide something called, an asset certification. It's usually a letter. Sometimes it's separate. Sometimes it's part of the package that they'll provide to the auditor. But there's very specific verbiage that they are certifying that the assets are complete and they're accurate as of the end of the year. Then there's some other requirements that they have to fulfill. But if they're willing and able to do that, we can perform the audit as the limited scope option. That allows us not to have to test the end of year asset balances, and we don't have to test the gain loss, and the income that accrues to those investments. So the dividends, the interest it might earn, and then just its gain loss on a daily basis. That does save us a good bit of work.

Jamie Nau: So that’s something I should consider if I am running a 401k, what bank I am working with?

Kim Moore: Yeah it is definitely something if you’re setting one up you want to think about that. If you're thinking of switching and if maybe you don't need an audit right now, but you know, maybe you're gaining employees, so you're getting closer and closer to that. Something you want to talk to your providers, if you have an investment adviser you want to talk to them, because maybe you've chosen one, two, three or more options that they offer, and you want to stick with that advisor. Even if you're with a particular provider, they may offer one option that doesn't allow for this limited scope. But maybe you can make a switch internally that will allow you to do it. It will save you money, not only with us. I mean, any auditor that you're going to go with, it's going to cost you more money. If that limited scope option is not available to you, you have to do the full scope. The testing of the investments at the end of the year isn't that big of a deal, but that testing of the gain loss, and the income, and depending on what kind of investments you have, that can get very time consuming and very pricey. Especially if you're not on that fixed fee, if you're paying by the hour. You know, that can get pretty expensive. So definitely something you want to find out sooner rather than later, and if necessary, make an adjustment, you know, make a change. Like I said, it may not involve that big of a change to you as the plan provider and even to your participants. They may not really see that much of a difference, but it can certainly change the audit, it can change the pricing. So definitely something you'd want to check out.

Jamie Nau: Are the majority of audits still limited scope?

Kim Moore: Yes. Yeah. The vast majority are. The cases where we see that they're not. If you're with a broker dealer, broker dealers don't tend to have those audits, so they are specifically exempted. So you are not allowed to accept. Even if they were to offer me a certification letter, I can't take it. So that's one example. And then some plan sponsors elect to go with a variety of different asset holders. And so, you know, they maybe in with some providers that are not in those categories I listed before. They may have things split up in such a way that you can't get a certification over the majority of the assets. It's becoming less and less common to do the full scope audit. They are still out there that we do still see. And we have a few, and we work with clients to try to get them so that they can be under the more limited scope option for a variety reasons. It's cheaper obviously for the audit, it's easier for us, but I think it just provides another layer of security to them, because they will see that certification as well. So it just gives them another kind of a good feeling at the end of the day they’ve got somebody else looking at all this information—they’re personally liable. So I always advise them, you know, it's just another layer of security for you to help protect yourself and to protect the plans. So I think it's a good thing if you can go that route.

Jamie Nau: Great. So Kim you are providing a lot of great information here. So I think it's a good time for me to throw out that we've created an e-mail account for questions to come in for the podcast. If anyone listening to the podcast has a question you can always email us at: 401k@summitcpa.net. The questions will get answered by one of us. I want to throw that out there real quick because there's a lot of really good information.

Kim Moore: Yeah, and don't hesitate to use that. I know some of this can get a little confusing. We get a lot of questions from people on the that 100 eligible. What exactly does that mean? And there are some complexities. It sounds pretty simple. It's 100 or, you know, how can you mess up counting to 100? But there are some other complexities around that. So if you have questions around that, or questions around this limited scope. Sometimes in asking their provider, I heard this limited scope thing, can I use that? Sometimes the providers will throw back some terminology you may not be familiar with that we didn't talk about today. So feel free to use that email account. If you've got some specific questions, we are happy to help you with that.

Jamie Nau: Yeah, definitely. We are here to help. So for one thing, I'm in leadership meetings with you, and I hear you talking quite a bit about how we beat people out on price quite often. So can you give me some examples of some of the things that help us stay on the lower end of the of the cost model?

Kim Moore: Absolutely. I'm glad you brought that up, Jamie, because that's another thing that comes up a lot as I'm talking to folks. It is a common question, and I can see why if I were in the shoes of a plan sponsor trying to get some audit quotes, asking why would you be cheaper than other people? You're doing the same thing, right? Well, there are some things that can drive the price. Part of it is in the work itself. We hire folks that, this is what they do. They want to be auditors and they want to be specifically 401(k) plan auditors. So they have a lot of background experience. We subscribe to a lot of different things that give us information that maybe the general auditor out there doesn't have, that lets us be very efficient in the work that we do. So we can dive into the audit, get it and get the work done. You're getting a very good audit from Summit CPA, better than you might get from even some bigger firms because this is what we do. What we specialize in. We don't have to spend a ton of time, and we don't have to assign a huge team of people to your audit, because we use very specialized folks that know what they're doing. You're going to be working primarily with one auditor. They may have some folks that assist them, but you're going to be primarily working with one person, and then with myself because I'm going to be doing the monitoring, and a review of that file, and in the report at the end. So you'll have pay for a whole team of people. The other thing is we do our audits remotely. So we're not going to come to your office. You know, I may be sitting on the East Coast. You may be out in California. Obviously, if I had to travel to your location, you'd have to pay for, you know, my airplane ticket, my hotel room, food and all that. So all of those costs are just zero on our end. Even if I'm outside the city where you are, I still might be charging you some fees for gas or whatever. And the other thing, because we work virtually, we can have staff working from various locations. We can get good staff, and because of the virtual nature of the way we do things, we can have competitive payments to our staff compensation. So just imagine if you're on the West Coast. The cost of living is going to be a lot higher than it would be where I am, which is in the middle of the country, and all of the costs are less. Because we don't have a big, huge office, we don't have to pay for that. So if you put all of those things together it helps keep our costs very competitive. And we tend to be, while maybe not the cheapest in the business out there, because we do want to make sure we give you a quality audit and, you know, we do have to pay for quality staff. So you don't want to be the cheapest on the block, but we're certainly usually not the most expensive, and that's why. Because of all of those reasons that I mentioned.

Jamie Nau: I think I mentioned it in every podcast, but it's really important to me. But I think the fact that we're experts in the area is a big deal. You know, I worked as an auditor and I was doing financial statement audits. But during the summer they would keep us busy with 401(k) audits. And it makes a big difference to have someone who actually understands the material and is the specialists, is inside of it and understanding it, versus someone who just does it, you know, three months out of the year. You know, it makes a big difference in terms of the quality you're going to get and how fast you can do it. There's a lot of questions I had when I was in auditor that you probably don't have because you're in the materials all the time.

Kim Moore: That's very true. And our staff, the large providers, we do multiple audits with those providers. So we know their websites, we can get in and get the information ourselves that we don't have to ask our clients, but we also don't have to ask the personnel from those providers. We just know where the stuff is and can go pull it ourselves. We get to know their investments. So we don't have to ask a lot of questions like, you know what? I've never heard of this. What is this? You know, they tend to use the same things. Their plans tend to work the same way, and so the fact that we've done several of those that look just like yours, you know, we don't look for any differences, but probably there's not going to be that many. They're going to be very similar. So that makes it a lot quicker and easier. And we know the good, bad and ugly for all of the providers out there. So when we hear that oh, we got a new client, and they're with so-and-so provider, we know the kinds of things that we're going to see on both sides of the fence with that particular provider, which is very helpful.

Jamie Nau: Great. So I'm sure you've sat through thousands of quotes and been involved in thousands of price quotes. Are there any questions that I haven't asked you yet that you get asked quite frequently during the quoting process?

Kim Moore: Yeah, I think we've covered the majority of it. There are some unique situations that can come up. For example, we do get calls from folks that the plan is terminating or maybe has already terminated. It's in the process of basically shutting down, you know, what does that do to the quote? And it does impact the ultimate price depending on the particular situation. So won’t go into a lot of detail on that. That's a good opportunity if you come across that situation to use that email you mentioned or give us a call. We would be happy to talk through the specifics with you. We'll also get folks that didn't know they needed an audit. Even all the way through the process, when they really did need an audit that year, they didn't know for whatever reason, they go ahead and they file their Form 5500, which is what drives the ultimate audit. So they file the Form 5500, and then lo and behold they get a letter from the Department of Labor saying, you didn’t follow the rules, you had more than those 100 people. Where's your audit? At that point it's a mad scramble because you only have 45 days to get it in. Obviously it's a huge shock. And now they're under the gun now because they didn't know. They are scratching their heads saying, what is this audit thing? I don't know what that was, I got 45 days to do it or a federal person is going to come get me if. So it be can become very frightening. And like I said, it's a mad scramble. So in those situations, it's best to just call me directly. Make sure that we can get started if you want us to do the audit right away, because obviously time is of the essence in those situations. If you miss that deadline, the fines can be very large. We're talking tens of thousands of dollars and up. So, you know, you don't want to go past the 45 days. So if that situation comes up and you are listening to this podcast and you get one of those letters, give me a call right away. And we have done those types of audits many times. So we're very familiar with the kinds of problems that you run into when you're under those very tight time constraints and what the DOL is looking for. We've had to give the work papers that we prepare as part of the audit, which normally those don't go outside the firm, but we have had to give those to the Department of Labor before. So we know that process. So, you know, that kind of situation. Just give me a call. Be happy to talk you through it. But I think those are those are the big areas of questions that we get.

Jamie Nau: I think we covered a lot today, and definitely can see people listening to this podcast and mad writing notes down. So there was a lot of good information here. So like I said, always feel free to reach out to us. But I appreciate your time today Kim.

Kim Moore: Thanks Jamie.