Fintech Friday: Betting on Tech to Keep Audit Costs Low
Human Interest is particularly interested in 401(k) plan investigations and audits by the Department of Labor.
The San Francsico-based fintech scoured the Employee Benefits Security Administration’s (EBSA) annual fact sheets, finding that the five-year average for funds recovered by EBSA investigations— including audits of 401(k) plans—is $573.5 million (FY2019-FY2023).
It added, “In each of those years, more than 65% of investigations included some type of corrective action or monetary return.”
It’s quite an increase over the previous five-year average of $520.9 million (2014-2018) and even more so over the $260.9 million five years before that (2010-2014).
The firm blamed the regulatory environment—and SECURE 2.0 and state mandates specifically—for exposing more 401(k) plan sponsors to “scrutiny from EBSA,” meaning concern is rising. It cited its research when noting that a survey of nearly 500 businesses found compliance monitoring and protection were two of the top three highly valued 401(k) plan services.
Consequently, it recently announced that it will cover up to $50,000 in audit expenses for its customers and provide access to four “vetted law firms specializing in supporting plans through a DOL audit.”
Chief Revenue Officer Rakesh Mahajan used his background in the wireless industry to describe the reasons for the move.
“When I first started in the wireless industry, we wanted to make it better for everyone,” Mahajan explained. “What I’m finding [in 401(k)] is there opportunity to make things better for everybody—plan sponsors, financial advisors, and particularly for participants. There’s a reason we have a retirement crisis in America. It’s because the industry hasn’t evolved enough. It hasn’t thought enough about how to make life better for plan sponsors.”
Making life better for plan sponsors was therefore the idea’s genesis, as was the randomness of EBSA’s audits.
“They want all this documentation and proof,” he added. “Plan sponsors must lawyer up and get their CPAs involved, and it gets expensive. So, how do we fix that? No.1, we fix it by delivering the best 401(k) in terms of tech and automation. I always describe this as a tech company that happens to do 401(k)s, but we do 401(k)s very, very well. I bring that up because we’re used to solving problems, whereas most of our legacy competitors do it manually.”
While (up to) $50,000 per audit defense could quickly add up, the firm is relying on that automation to scale the process and keep costs low.
“That’s the theory,” Mahajan concluded. “We’ve built an engine to help work with the lawyers and CPAs required to provide this defense. Everything’s done. In fact, we’re the 3(16) on 97% of our plans. We take that on because we believe we do everything perfectly. Therefore, we’re fine to actually sign Form 5500 for them and take on that liability.”
