Outside voices and views for advisers

The top 5 mistakes made by 401(k) plan sponsors

Helping retirement-plan clients avoid common administrative pitfalls can save them time and money

Jul 5, 2017 @ 3:39 pm

By Aaron Pottichen

As a retirement plan consultant, I have come across many plan sponsors that have inadvertently made mistakes in their 401(k) plans. Most have just never had anyone show them how to correctly administer a 401(k), or they have so much on their plate that something inevitably falls through the cracks.

Penalties for administrative blunders can be costly, through fines or, at the severe end of the spectrum, plan disqualification, creating a taxable event for all participants.

Below, I've outlined the most common mistakes I've seen plan sponsors make, as well as ways for plan advisers to guide their clients away from those mistakes.

• Not remitting payroll in a timely manner

Of all the problems I'll discuss, none is more obvious to plan participants than not remitting payroll to the record keeper in a timely manner. This can become an internal public relations disaster for a company. A plan sponsor might also have to go through a voluntary correction program, and potentially owe fines depending on the severity of the mistake.

We recommend clients set up a 360 integration with their payroll vendor and record keeper, which entails setting up automatic feeds between the service providers. While this isn't available in every payroll and record-keeper situation, it is becoming more prevalent.

If plan administrators are uncertain about following through on remitting timely payroll, we recommend they consider hiring a 3(16) fiduciary, which assumes fiduciary responsibility for plan administration, to take over that responsibility.

• Not following the plan document correctly

While record-keeping systems are set up to halt non-compliant procedures, they don't catch everything.

Case in point: Our firm once came across a plan that had not automatically enrolled employees, even though its plan document stated employees should be automatically enrolled unless they had declined enrollment. This oversight by the employer ended up costing hours of work for the company and a few thousand dollars in penalties.

To avoid plan-document-related mistakes, we tend to advise clients not to overly complicate plan design. While some circumstances may favor a more complex design, simpler is, more often than not, a good way to go.

• Not benchmarking plan fees

The recent spate of lawsuits in 401(k) land is an easy way to show plan sponsors why they should be benchmarking their retirement plan fees.

A few years ago, our firm came across a plan that was in the hundred-million-dollar range, and no one that administered the plan could remember having reviewed the fees. After dissecting the fees, we discovered the plan was paying double the benchmark average for a similar-sized plan.

The best solution here is for advisers to take the reins and run a benchmark report on a frequency of no less than every three years. If the plan is growing quickly in participant headcount and assets, it may be worthwhile to do this annually.

• Not selecting a quality auditor

I cannot stress enough the importance a good auditor provides in making sure a company is doing the right things at the right time.

A client of ours was notified by its auditor of incorrect deferral amounts that had been remitted on behalf of participants throughout the year. This oversight might not have been discovered without a notification from the auditor. Because it was, participants had more money deferred into their 401(k) and had more employer match contributed on their behalf.

When recommending an auditor, it's best to go with one that performs a lot of qualified plan audits, as the Internal Revenue Service has concluded their reports contain fewer errors.

• Not documenting the reason for changes

When it comes to the retirement plan, a plan sponsor's institutional knowledge is great. But documentation is everything.

Our firm has commonly encountered plan administrators new in their role who have no idea as to why certain plan features, investments or vendors were selected. Part of the reason for this is because the decisions that lead to those features and vendors are not documented anywhere.

For example, a plan sponsor we worked with was using a vendor deficient in areas in which the sponsor clearly needed help. As it turns out, the company had allowed a small group of employees to perform the vendor search and selection. This ended up being a positive story, because the employees had a strong connection to the vendor they selected.

But the takeaway here is that documentation of decisions today helps guide tomorrow's decisions. This is why plan advisers should take diligent notes of meetings; it's also a way to add instant value to a new plan administrator.

Humans are fallible and mistakes will happen, but the solutions listed above can help clients avoid them. Part of the value retirement plan advisers provide is in guiding clients away from land mines.

Aaron Pottichen is the retirement services president at CLS Partners, an Austin, Texas-based financial advisory firm.


What do you think?

View comments

Recommended for you

Sponsored financial news

Use arjuna-design' to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

Apr 30


Retirement Income Summit

Join arjuna-design at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

All of the noise in the District of Columbia is distracting your clients. Ben Phillips of Event Shares explains what deserves your attention (and what doesn't) as we head into 2018.

Recommended Video


Latest news & opinion

Wells Fargo, Morgan Stanley use contrary tactics to keep advisers

Wells is helping brokers transition to independence within the firm, while Morgan is taking them to court.

Fidelity pushes Vanguard to compete on brand in 401(k) plans

With Fidelity imposing an additional fee, Vanguard likely will look less attractive compared with comparably priced index-fund providers, advisers said.

Goldman's measure of risk appetite hits record

Global stocks and U.S. Treasuries are seeing their most "extreme" start to a year ever, bank says.

Wells Fargo erasing hurdles for advisers looking to move to its IBD

If advisers commit to staying at FiNet for a two-to-three year period, they will not have to pay Wells the fees it currently charges advisers switching channels.

El-Erian warns advisers on ETF liquidity

If investors decide to exit exchange-traded funds en masse, things could get nasty, economist says.


Hi! Glad you're here and we hope you like all the great work we do here at arjuna-design. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting arjuna-design.com? It'll help us continue to serve you.

Yes, show me how to whitelist arjuna-design.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Last News

thornberg funds excess social security tax withheld married filing jointly td bank td ameritrade usaa precious metals ferrari 288 gto evoluzione chase bank ira rates schwab etf review age to withdraw from 401k hsa compatible health plan eaton vance high yield bond fund personality test used for hiring john hancock mid cap index fund what is the meaning of nudge in hike signing up for medicare part a mutual of omaha guaranteed life insurance usaa ultra short term bond fund first data corporation greenwood village co bank of new york mellon chicago vanguard total bond market index fund signal shares what happens when the fed raises interest rates are junk bonds a good investment what qualifies as a second home what is a good expense ratio for 401k what is a discount brokerage firm social security spousal benefits divorce northwestern mutual whole life insurance doubleline core fixed income fund take lump sum or annuity pension dow jones industrial news t rowe price small cap value fund thrift savings plan contribution limits gifting appreciated stock to charity blackrock global allocation c share gerber life college fund undervalued small cap stocks t rowe spectrum income