In Defense of the Humble 401(k) Audit
October 2025
Nate Moody, CPFA
Pooled Employer Plans (PEPs) are having a moment. Over the past few years, more national recordkeepers and investment firms have launched Pooled Employer Plans, promising simplified administration and economies of scale. One of the most common selling points? The idea that by joining a PEP, you can finally skip the annual plan audit.
The marketing pitch is very enticing: “Join our PEP and avoid the hassle of an annual audit.” For many small and mid-sized employers, that sounds like music to the ears: one less vendor, one less invoice, one less compliance headache.
Before you delete your auditor’s contact information, it’s worth pausing to ask: what exactly are you giving up when you avoid a plan audit and what is the purpose of the audit?
The Audit’s Real Job
A 401(k) audit isn’t just a box to check or a formality to survive once you cross the 100-participant (or 80/120) threshold. It’s a structured, independent review designed to catch mistakes early and confirm that your plan is being operated in accordance with its terms and with ERISA. You should view it as a safeguard (albeit occasionally a painful one).
Auditors test participant data, payroll feeds, loan repayments, investment allocations, and distributions. These are the details that, if wrong, can quietly accumulate over years. They are also the same details the DOL and IRS will eventually look at if they ever come calling. The difference is that your auditor looks every year. The DOL and IRS look when something has gone wrong.
When “Avoiding an Audit” Becomes a Risk
PEP providers often frame audit avoidance as an administrative benefit, and to be fair, in the right situations, it can be. The PEP structure shifts many fiduciary and reporting obligations to the pooled plan provider (PPP). But it also shifts the visibility.
As an adopting employer, you’re no longer engaging directly with an auditor who’s reviewing your plan data. Instead, your plan is a small slice of a much larger entity’s audit. The PPP’s auditor is looking at the pooled trust and aggregated processes, not at whether your payroll file missed an employee who should’ve been eligible six months ago.
In other words, when you avoid your plan’s audit, you may also be avoiding your plan’s oversight. It’s also worth remembering that some PEPs are built and administered by financial institutions that serve multiple roles: recordkeeper, investment manager, and fiduciary. That can create a structure where the same organization designs the investment menu, manages the funds, and oversees itself as the plan administrator. While those arrangements may be disclosed, they can blur the lines of accountability and limit the independence that a standalone plan structure provides. For plan sponsors who value transparency and control, that’s an important trade-off to weigh.
The Illusion of Relief: 3(16) Administrative Fiduciaries
But Nate, my PEP has a 3(16), why would I care if a mistake isn’t caught in a timely manner? Another piece of the PEP sales pitch is the promise of outsourced administration through a 3(16) fiduciary. On paper, that sounds like a plan sponsor’s dream, someone else taking responsibility for all the day-to-day compliance work.
In practice, 3(16) contracts can be far less clear than advertised. Many include broad disclaimers and indemnification language that protect the provider if something goes wrong. A common example: if payroll data or contribution files are inaccurate or late, the 3(16) administrator often disclaims responsibility, stating they’re not liable for errors resulting from incorrect or untimely information supplied by the employer.
That kind of language means the employer still holds the risk for one of the most common sources of operational failure, payroll and contribution errors. The 3(16) fiduciary may handle filings and notices, but when it comes to data accuracy, the burden quietly shifts back to the plan sponsor.
So while the contract might sound like full relief, it’s often more of a shared risk dressed up as an outsourced solution.
Why We Still Appreciate the Annual Audit
As fiduciary advisors, we’d much rather see a small operational issue surface during a plan audit than a formal notice from the Department of Labor or the IRS years later. One of those situations ends with a manageable correction and a learning opportunity. The other ends with penalties, legal exposure, and a lot of time explaining what went wrong.
A good auditor doesn’t just check your math. They validate your processes. They confirm that your contributions are timely, your eligibility rules are applied consistently, and your loans and distributions are handled properly. They’re a second set of trained eyes who make sure your fiduciary responsibilities are being met.
That’s not a hassle. That’s prudent oversight.
A Balanced Perspective
PEPs may have legitimate appeal, especially for small employers who’ve struggled with administrative complexity or inconsistent compliance. But “no audit” shouldn’t be the deciding factor.
The question isn’t “how can I avoid an audit?” It’s “how can I ensure my plan is being run correctly?”
Sometimes that means hiring an independent auditor who knows your team, your payroll system, and your plan provisions. Someone who’ll pick up the phone, ask questions, and help you correct small mistakes before they become big ones.
In an era where convenience often wins the marketing battle, we think the humble 401(k) auditor still deserves a little respect.
Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor. | 130 Springside Drive, Suite 300, Akron, OH 44333–2431 | Telephone: (800) 765‑5201 | Lebel & Harriman, LLP and Lebel & Harriman Retirement Advisors are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.
