We’ve discussed fiduciary responsibility as it applies to a 401(k) advisor, but are you familiar with your fiduciary responsibilities as the 401(k) plan sponsor?
So, who is the 401(k) plan sponsor? For this article, we’ll define them as the individual(s) in charge of handling the company’s 401(k) benefit. This may include individuals in the HR, payroll, and/or finance departments. The plan sponsor has a fiduciary obligation to ensure that the plan is operated in a manner that prioritizes the interests of the employees (i.e., plan participants). Additionally, they should strive to offer the most efficient and effective 401(k) benefit possible, without bringing any negative impact to the company.
Understanding what your fiduciary duties entail and how you must act in the best interest of plan participants is vital, as failing to do so can expose your company to significant legal and financial risk.
Remember, even if you hire a fiduciary 401(k) advisor and/or a reliable recordkeeper or third-party administrator (TPA) to help with plan administration, ultimately, “the buck stops” with you as the plan sponsor—meaning any major issues or errors will point back to you. The more you can limit certain mistakes or oversights, the better!
1. Improper Plan Design
An effective and efficient 401(k) plan begins with the plan design. A poorly designed retirement plan can lead to inefficiencies, compliance issues, unhappy participants, and, in turn, low participation. To avoid this, plan sponsors should regularly assess whether the plan meets the needs of employees and aligns with company goals.
A well-structured plan:
- Features clear options and proper contribution levels
- Offers diverse, low-cost investment options that match varying risk tolerances and retirement timelines
- Includes strong fiduciary oversight with clearly documented roles and responsibilities
- Ensures better engagement and overall success
If the plan design isn’t thoroughly and regularly reviewed, the plan could become a burden to the company. For example, if there are avoidable compliance test failures each year or employees aren’t being informed about when and how they can contribute to the plan, the company could face penalties.
2. Inadequate Plan Administration
If recordkeeping or participant data is inaccurate, or 401(k) contributions aren’t processed on time (per IRS rules), the company could face potential missed contributions, market-related losses and gains, additional penalties, and the administrative burden of correcting the issue through DOL and IRS programs. You’ll also have to deposit all late elective deferrals and any associated earnings into the plan’s trust.
Sponsors must maintain accurate and timely recordkeeping practices, ensure compliance with regulatory deadlines, and provide clear communication to participants.
3. Lack of Ongoing Communication
Unfortunately, we’ve seen this simple step go overlooked too often. A 401(k) plan is not a set-it-and-forget-it benefit, and the same applies to employee communication. Employers should share the following regularly:
- Required annual reports and notices (e.g., Summary Plan Description)
- Plan performance and investment options
- Regulatory updates and plan changes (e.g., automatic enrollment)
- Eligibility rules and contribution instructions
- Educational resources to support smart retirement planning.
If eligible employees aren’t notified or given the chance to contribute, employers must correct the error—often by making a qualified nonelective contribution (QNECs) to make up for missed deferrals and earnings.
Speaking of eligible employees, defining who is and isn’t eligible is crucial. If your plan document says employees are eligible after six months, but someone slips through the cracks or a contractor is wrongly included, you could trigger nondiscrimination testing failures and compliance issues.
401(k) plan sponsors should clearly define eligibility and regularly revisit it to avoid costly corrections.
4. Failing to Monitor Plan Fees
Another vital part of your fiduciary responsibility as a 401(k) plan sponsor is ensuring reasonable plan fees, which includes regular fee benchmarking. Failing to monitor these costs could result in the company and employees paying more than they should. Plus, these fees can impact the overall performance of participants’ investments.
And while the DOL recommends that plan sponsors benchmark their plan fees every three to five years, many miss this step, putting their organization at risk. Regular fee benchmarking ensures costs are reasonable and competitive. If they become too high, you may need to work with your advisor to reduce expenses or switch your plan.
5. Not Conducting Regular Plan Reviews
In addition to fees, the plan itself should be reviewed regularly, as its structure or regulatory landscape may change.
Plan sponsors should regularly review plan performance, investment options, and compliance procedures to ensure the plan remains optimal for both the company and participants. Make plan amendments for law changes that have already occurred; if you miss the amendment deadlines, you can use the IRS correction program.
6. Failing to File Form 5500
Late submission or failure to file Form 5500 is an all too common mistake 401(k) plan sponsors make—and a potentially costly one at that. Your company could be hit with hefty penalties from the IRS or DOL for this completely avoidable mistake.
Form 5500 reports “the qualification of the retirement plan, its financial condition, investments, and operations of the plan.” Plan sponsors or their fiduciary advisor must file Form 5500 by the last day of the seventh month after the plan year ends (July 31 for calendar year plans).
7. Lacking or Not Following the Compensation Definition
We’ve seen too many 401(k) plan sponsors make two mistakes in this area: they either fail to define what compensation is included and what is not, or do not follow the definition outlined in their plan document.
Ensure your plan document clearly defines the types of compensation included and those excluded, such as bonuses, commissions, overtime, and accrued paid time off.
Compensation is key in calculating employee contributions, so not following the compensation definition can result in incorrect employee contribution calculations. Simply put, employees may receive more or less than they are entitled to. If you offer employer matches and profit-sharing, these contributions could also be incorrect.
This is yet another mistake that imposes a significant financial and administrative burden on the company to rectify. However, you can avoid this by understanding the language in your plan document and reviewing plan election forms consistently to ensure they align.
Be a Proactive & Vigilant 401(k) Plan Sponsor
As you can see, these common mistakes can be largely prevented by understanding your fiduciary responsibility as a plan sponsor from the outset. When you take proactive steps in 401(k) plan administration, you’ll improve the plan’s efficiency, compliance, and success, ultimately benefiting both your company and employees—and fulfilling your duty to both parties.
Avoiding these risks doesn’t have to be hard, either! You’ve already taken the first step in educating yourself on your role. When you partner with a fiduciary 401(k) advisor, you can also rely on their guidance. Don’t be afraid to ask questions—although an experienced, reliable advisor should be proactive in helping you stay updated and compliant.
Do you have more questions about your role as a 401(k) plan sponsor? Contact FSRP today to learn more and discover how we can help you design the ideal plan for your business and employees.
Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Financial Strategies Retirement Partners (FSRP) is a Registered Investment Adviser. Financial planning services offered by FSRP are separate and unrelated to Commonwealth.