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Thayer Partners Blog

The Hidden Costs of a 401K Audit

[fa icon="calendar"] Jul 6, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

The_Hidden_Costs_of_a_401K_Audit.jpgBusiness owners faced with their first 401K audit often have a lot of questions about the process. One of the biggest concerns for owners is how much an audit is going to cost. Generally speaking, an audit costs between $6,500 and $13,000, but there are all kinds of variables. Not knowing how much your 401K audit will cost—or should cost—could mean that you end up paying more than you’re prepared to pay.

Determining the Cost of the Audit

Plenty of firms will offer to audit your plan, and every single one of those firms may seem to have a different way of determining the price of the audit. However, even though different CPAs will quote you different prices, there are a few factors you can count on them taking into account when providing an estimate:

  • The size of your plan
  • The complexity of your plan
  • The timing of your audit
  • The location of your office

All of these factor into how much your audit will cost. For example, if your 401K plan year-end coincides with the end of the calendar year, the auditing firm may charge you more; some firms charge up to 15% more for calendar year-end audits than for year-end audits that don’t fall on December 31. Similarly, some firms will factor in travel to your office, which can make your location a huge factor in determining the price of the audit. The size and complexity of your plan are obviously going to affect the cost. A large plan will take more time to audit, and a plan can take more time to evaluate if there have been changes like plan mergers or if the plan contains investments that are considered out of the ordinary, such as company stock.

Flat Fee or Hourly Rate?

Most CPAs will charge you for a 401K audit in one of two ways: you’ll either be charged by the hour or you’ll be given a flat fee.

If you’re charged by the hour, the firm you engage will bill you a set rate for each hour they spend on the audit. Other firms will offer you a flat fee rate; the number of hours they work on the audit doesn’t matter. Most businesses prefer to go with a flat fee for obvious reasons. If the CPA goes over their estimated hours, hourly billing can end up being a lot more than you expected to pay. By contrast, flat fee billing guarantees that you will pay the same price, no matter the time or effort. While hourly billing can be fair, it’s usually safer to go flat fee.

Hidden Costs

Of course, even flat fee billing doesn’t guarantee that there won’t be some hidden costs in you 401K audit. First and foremost, you need to be careful about who you hire. A firm that promises a very low price might end up costing you more by making errors or by filing late, racking up IRS penalties. Or the firm might be low-balling the 401k audit fee while burying extra fees in the broader accounting relationship. And some firms might try to charge you additional fees for unexpected complications or delays, especially if they’re charging by the hour.

One easy way to protect yourself from this is to ensure you get all of your material to your CPA early on in the audit process. That way, they don’t have any excuse for not knowing about certain features of your plan or for filing late. Another way to protect yourself is to ask how many 401K plans the firm audits. Just like 401K plan advisors, there are some firms with just a few plans and other—real specialists—that have dozens or even hundreds. A third way is to get a handful of references, and choose your questions carefully.

Value of Experience and Service

The long and short of having a 401K audit completed is that it will cost you. Rather than looking only at the price tag, be sure you think about what other advantages your CPA is offering you: relevant experience and service are important in selecting an auditor. A reputable, experienced CPA can help you complete your audit on time and correctly, for a reasonable fee with no hidden costs or sneaky fees.

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Topics: 401k

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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