Most 401(k) problems don’t start in the plan.
They start in payroll.
Plan sponsors tend to think of payroll as an administrative function and the 401(k) as a separate benefits issue. That separation is convenient—but it’s also wrong. Payroll is the engine of the retirement plan, and when it misfires, the damage spreads fast.
A missed deferral election. An incorrect compensation code. A delayed remittance. An employee misclassified as ineligible. These errors often seem small in isolation, but in a 401(k) plan, they create a domino effect.
One payroll mistake can lead to missed employee contributions. Missed contributions lead to corrective qualified nonelective contributions. Corrections trigger earnings calculations, amended tax reporting, and participant notices. If the error is widespread or persistent, it can even rise to the level of a compliance failure requiring formal correction under IRS programs.
And that’s before you get to audits or litigation.
What makes payroll errors particularly dangerous is how quietly they occur. Many plan sponsors don’t discover them until an annual nondiscrimination test fails, an auditor asks uncomfortable questions, or a participant complains that their deferrals never showed up. By then, the error may have been repeating for months—or years.
Technology hasn’t eliminated the problem. In some ways, it’s made it worse. Payroll systems, recordkeepers, and HR platforms don’t always speak the same language. A change in one system doesn’t automatically flow to the others unless someone is actively monitoring it.
For plan sponsors, the lesson is clear: payroll oversight is fiduciary oversight.
That means regular payroll audits, clear ownership of deferral data, documented reconciliation processes, and coordination between payroll, HR, and plan vendors. The goal isn’t perfection—it’s early detection.
In a 401(k) plan, small payroll errors don’t stay small. They compound. And by the time they surface, the fix is always harder—and more expensive—than anyone expected.
