Many plan sponsors assume that once a retirement plan is established and service providers are hired, the plan will simply run itself. Unfortunately, that assumption is one of the reasons operational mistakes in retirement plans are far more common than most sponsors realize.
Retirement plans operate in a complicated regulatory environment. Payroll systems, eligibility tracking, participant elections, and contribution calculations must all work together properly. When one piece of that system fails, errors occur. In many cases, those errors go unnoticed for years.
One of the most common problems involves missed deferrals. An employee becomes eligible for the plan, but payroll never begins withholding contributions. Sometimes the employee was never properly enrolled, while other times the payroll system simply didn’t process the election correctly. By the time the issue is discovered—often during an audit or compliance review—multiple pay periods have passed and a correction must be made.
Eligibility errors are also frequent. Employees who should have entered the plan are left out because of incorrect service tracking or misunderstandings about eligibility rules. Conversely, employees sometimes enter the plan earlier than permitted by the document.
Another common issue involves late deposits of employee deferrals. The Department of Labor requires employee contributions to be deposited as soon as they can reasonably be segregated from the employer’s assets. When payroll processes are inconsistent, deposits may occur later than permitted.
What surprises many plan sponsors is that these mistakes don’t necessarily reflect negligence or bad intentions. Retirement plans involve complex administrative processes, and even well-run organizations can experience operational failures.
The key for plan sponsors is not assuming mistakes will never happen. Instead, sponsors should conduct regular reviews with their TPA, recordkeeper, and advisors to ensure the plan is operating according to its terms.
Retirement plan compliance isn’t about perfection. It’s about identifying problems early and correcting them before they grow into something bigger.
