Picture this: an employee opens their pay stub expecting to see 3% of their salary going into their 401(k). Instead—nothing. Payroll missed the deferral months ago. By the time anyone notices, the company owes back contributions, lost earnings, and maybe even penalties.
The short answer: it depends.
The long answer: there are four main cost categories, and how you structure them determines whether you get a fair, sustainable plan—or one that frustrates employees and exposes your company to liability.
Think of a 401(k) like building a house—you’ll pay for the architect, the contractor, and the materials. Skip one, and the whole structure is at risk. The same is true for retirement plans.
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1. Not Following the Plan Document
Your plan has a legal blueprint. If it says bonuses count as compensation for 401(k) purposes, then contributions have to come out of bonuses—even if payroll never set it up that way.
Example: The IRS describes a situation where a company—let’s call it BCDE Company—didn’t follow its own plan’s definition of compensation. The plan said that 401(k) contributions should be based on all types of employee pay, including bonuses. However, the company’s payroll system excluded bonuses when calculating deferrals and employer matches. Once the error was discovered, BCDE had to correct it by making up missed contributions and lost earnings for all affected participants.
Fix: Create a 2–3 page “cheat sheet” of your plan rules in plain English. Review it with payroll and HR annually.
2. Payroll Errors
Missed deferrals, wrong match formulas, or auto-enrollment failures are the #1 source of 401(k) problems. They happen because payroll is complicated and HR staff changes frequently.
Analogy: Payroll mistakes are like small leaks in a roof—you don’t notice until the water damage spreads, and by then the repair bill is far bigger than the leak itself.
Fix: Run test files when systems change and do quarterly spot-checks comparing elections vs. actual deductions.
3. Ignoring Fee Benchmarking
Plans often get sued for charging participants too much in fees. As your plan grows, costs should go down as a percentage of assets—not up.
Example: Imagine your company doubles in size. Great news—more employees usually means more plan assets. But if nobody is monitoring fees, your recordkeeper or TPA may keep charging the same rate even though a sliding scale or asset-based pricing should reduce costs. Unless someone benchmarks and renegotiates, you could be overpaying thousands of dollars each year.
Fix: Benchmark fees annually and document it. Run an RFI/RFP every 3–5 years.
4. Expensive Fund Share Classes
Funds often have cheaper versions (share classes or CITs). Same strategy, lower cost. If you’re not reviewing, employees may be overpaying.
Analogy: It’s like buying the exact same flight, but paying $800 instead of $400 because you didn’t check all the ticket classes.
Fix: Review fund expenses annually and move to lower-cost share classes when available.
5. Weak Fiduciary Process
Courts don’t just care what you did—they care what you can prove. No minutes = no defense.
Case in point: In Nunez v. B. Braun Medical, Inc. (E.D. Pa., 2023), fiduciaries successfully defended against an ERISA breach-of-duty claim because they could demonstrate a documented process—complete with committee meeting minutes, investment reports, and vendor reviews. Legal analysts noted that thorough documentation of fiduciary meetings and monitoring activity was key evidence of prudence in the case.
Conversely, courts have treated the absence of minutes or reports as evidence that oversight never occurred, even if the fiduciaries insist it did.
Fix: Hold fiduciary committee meetings at least twice a year, keep agendas, take minutes, and store all reports in a central location. Consistent documentation is your best protection if your process is ever challenged.
6. Relying Solely on the Recordkeeper
Recordkeepers aren’t fiduciaries. Their investment menus often favor their own funds. Without an independent advisor, you risk biased lineups and overlooked fees.
Analogy: It’s like asking a car dealer if their financing terms are fair—you’ll only hear what benefits them.
Fix: Retain an independent advisor to review the menu, benchmark fees, and advocate for your plan.
7. Missed Notices
Annual disclosures are required by law. If they’re late or missing, regulators can step in.
Example: Imagine a company skipped a single fee notice. The Department of Labor caught it in an audit and fined them—proof that even one miss counts as noncompliance.
Fix: Assign notice delivery to the recordkeeper.
8. Naming an Individual as Trustee
If your HR manager is the trustee, their personal assets could be at risk in a lawsuit.
Analogy: It’s like asking your office manager to cosign every employee’s mortgage—an enormous personal liability they never signed up for.
Fix: Use the recordkeeper’s trust company instead.
9. No Continuity When Staff Leaves
When payroll or HR staff turn over, processes fall through the cracks. That’s when errors pile up.
Example: Imagine a company discovers that during a payroll manager’s exit, auto-enroll wasn’t applied to 40 new hires. Months later, correcting it cost thousands in contributions and penalties.
Fix: Map responsibilities on RACI Chart (Responsible, Accountable, Consulted, and Informed), train backups, and re-audit after transitions.
Final Word
401(k) compliance doesn’t have to feel like walking a legal tightrope. Now you know the most common traps—like payroll errors, missed notices, and poor fee oversight—and how to prevent each one before it becomes a costly problem.
Most employers don’t break the rules on purpose. The issue is just how easy it is to miss something when roles shift, systems change, or the rules themselves are unclear. But you’re not alone—and you don’t have to figure it out on your own.
Your next step:
Start by reviewing your current fiduciary process. If you’re not sure where the gaps are—or if you just want a second set of eyes—we’d be happy to walk through it with you.
At Carnegie Investment Counsel, we’ve help companies stay compliant, lower plan costs, and give their employees greater confidence in their financial future.
If you’re ready for a plan that works as hard as you do—we’re ready to help build it. Set up a call with one of our advisors today.
For informational and educational purposes only. Opinions are subject to change.
Carnegie Investment Counsel (“Carnegie”) is a registered investment adviser with the Securities and Exchange Commission. Registration as an investment adviser does not imply a certain level of skill or training. For a more detailed discussion about Carnegie’s investment advisory services and fees, please view our Form ADV and Form CRS by visiting: https://adviserinfo.sec.gov/firm/summary/150488.
You may also visit our website at: https://www.carnegieinvest.com
