Most Common 401k Operational Errors

12.14.2017 – Many advisors, plan sponsors and employees spend the majority of their time focusing on the investments in the 401k plan. While this is an important piece of the puzzle, if the day to day operations get ignored for the more exciting discussions about investment returns and the outlook of the market, it can lead to costly oversights. Below are some of the most common and costly operational errors that Retirement Plans, Inc. have run across when working with a new client.


Incorrectly Administering Eligibility Rules

This is the most common issue that we run across and it also tends to be the most expensive mistake a company can make. In order to properly administer the eligibility roles, the employer must know the waiting period and potentially the hours worked during that waiting period. They must then know what dates employees are allowed to enter the plan. Is it immediately upon becoming eligible? Or is it monthly, quarterly or semi-annually? If a company finds itself in a situation where eligibility has been improperly administered, they are able to make a voluntary correction. During this process the company is responsible for contributing a portion of what the employee would have contributed if allowed plus a portion of the employer matching dollars they would have received (if applicable). From there the company must also calculate missed earnings on those dollars and contribute that amount to the employee’s 401k account.


Failing to Follow the Plan Adoption Agreement

With 401k adoption agreements being 40-60 pages long, this might be the toughest on the list to ensure proper compliance on, but it is definitely one of the most important. When the Department of Labor or Internal Revenue Service audit 401k plans, one of the first items they look at is plan operations. This includes ensuring that a company is operating the plan as outlined in the plan adoption agreement. Plan operations, demographics and employees change over time. This makes reviewing the current plan document even more important than ever. If a plan operational error is found during this review, the error can always be corrected moving forward or the adoption agreement can be amended to reflect your current operations. This is much easier than trying to fix a mistake caught by an IRS audit.


Improperly Allowing Distributions to Participants

Much of this goes hand in hand with the prior point. Can a participant take a distribution at 59.5? Can they take money out at an early retirement age or normal retirement age? Can they take loans or hardship distributions? Once it’s determined when a participant can take a distribution, what money sources can they take those distributions from? A third-party administrator can help companies better determine these items. The most common mistakes that we see on this front is in hardship distributions. Employers are responsible for ensuring that the employee requesting the hardship withdrawal is truly eligible according to IRS guidelines. Allowable reasons for a hardship withdrawal include funeral expenses, medical expenses or to prevent foreclosure on a primary residence to name a few.


Failing to Keep Proper Documentation

This is without a doubt the most important item on our list today. In today’s lawsuit happy environment, it is in the best interest of every 401k plan sponsor to retain documentation. This includes enrollment forms (even if the employee is declining to enroll), contribution change forms, loans requests and distribution request forms. Plan sponsors should also document investment reviews, provider benchmarks and any other committee meetings with reasoning for the decisions that were made during those meetings.


Maintaining a compliant and efficient 401k plan can see daunting at times, but partnering with the right advisor and third-party administrator can take the burden and worries off the plan sponsor. If you have questions regarding plan operations or would like Retirement Plans, Inc. to review your current plan provisions, contact Rich Myers at or via phone at 614-339-1918.