5 Costly 401(k) Errors Employers Often Make

By Mike Murphy, FiduciaryShield — When a company offers a 401(k), the business owner inherits the roll of plan sponsor. With this role comes a fiduciary responsibility to the plan participants. If mistakes are made when managing the plan, it can result in a significant loss of time and money.

Many smart business owners are outsourcing their responsibilities to an outside plan fiduciary to avoid potential pitfalls. Plan sponsors who choose to retain fiduciary responsibility should take steps to avoid these five common mistakes.

Failure to Evaluate Service Providers

Plan sponsors are required to act prudently and review the plan’s record keeper, Third Party Administrator (TPA), and other service providers. This review should include a comparison of the current costs and services to those of other potential providers. If your plan hasn’t been reviewed in a while, it’s not uncommon to find unreasonably high fees that could easily be resolved by switching to a provider with thinner margins.

Failure to Review Investment Options

Ideally, the investment options in a 401(k) plan should be reviewed on a quarterly basis. At a minimum, this review should occur annually. The purpose of the review is to confirm each of the following items:

  • Investments meet the guidelines stated in the Investment Policy Statement
  • Investment options are properly diversified
  • Investment management fees are reasonable
  • Appropriate investment share classes have been offered

There has been a rash of lawsuits focused on investment fees, choice of investment share class, and failure to prudently review and choose investment options. Having the right investment options available helps participants reach retirement goals and protects plan sponsors from litigation.

Failure to Remit Deposits in a Timely Manner

This is one of the easier problems to avoid. It is also one of the more common mistakes. If deposits are not remitted on time, the plan sponsor may have to undergo a voluntary correction program. Depending on the severity of the mistake, fines may be owed as well.

Failure to Follow Your Own Plan Document

401(k) sponsors have the flexibility to make plan-specific design decisions. Failing to follow these self-imposed choices has traditionally been red flag that leads to failed audits.

Plan sponsors can minimize the likelihood of this mistake by ensuring that at least one employee is thoroughly versed in the plan specifics and ERISA guidelines. Companies who do not have a dedicated employee in place should strongly consider outsourcing administrative tasks to an outside plan fiduciary.

Failure to Document

Documentation is a critical element of 401(k) compliance. There are two primary areas where thorough documentation is necessary.

  1. Decision and Actions
    The decisions made in the plan must be prudent and in the best interest of the plan participants. Without documentation as to why a change was made, there is no proof that this rule has been followed. This requirement is often hard for business owners to swallow, but is a necessary step none the less.
  2. Monitoring of the Plan
    As a fiduciary, you are required to monitor your 401(k) plan. You may be lucky enough to have a plan that works well without any necessary modifications, but this does not relieve you of your duties. You must still document that you are monitoring your plan and have performed evaluations on a regular basis.

Understanding Your Responsibility

As an ERISA plan consultant, I review numerous plans. During the review, I routinely find the above-listed mistakes. Many are simple to fix while others are costly errors.

Most often, these mistakes are a result of the business owner never having been shown how to correctly administer their 401(k) and being unaware of the requirements. Other times, business owners are simply too busy running their business to dedicate time to the administrative portion of their 401(k) plan.

Some plan sponsors are under the impression that their recordkeeper or TPA is handling these responsibilities for them. I consistently encounter business owners who mistakenly believe that the administration of their plan is “taken care of”. The misunderstanding that the recordkeeper or TPA is acting as a fiduciary to ensure these items are being handled is far too common.

Simple Steps for Avoiding Mistakes

Avoiding potentially costly 401(k) mistakes can be as easy as following these simple steps:

  1. Don’t assume that the work is being done by your recordkeeper or TPA. Most Recordkeepers and TPAs do NOT act as fiduciaries.
  2. Put a plan in place to regularly monitor and evaluate your 401(k) plan.
  3. Document your process and reasons for making changes.
  4. If you aren’t comfortable completing steps 2 and 3 on your own, consider outsourcing the work to a plan fiduciary.