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Offering a workplace retirement plan like a 401(k) is a valuable benefit—but it also creates significant compliance and administrative responsibilities for employers. Small business 401(k) compliance failures can expose companies to regulatory penalties, fiduciary liability and costly corrections.
If your company sponsors a retirement plan, understanding common 401(k) compliance, administration and plan design risks is essential. Below are five of the most common mistakes—and how to avoid them.
401(k) compliance requires employers to follow strict federal regulations under ERISA and Department of Labor guidelines. Employers must ensure timely contribution deposits, accurate plan administration, proper disclosures and ongoing fiduciary oversight.
Even small errors can trigger audits, penalties or plan corrections.
As a plan sponsor, you don’t just offer the plan; you also take on fiduciary duties. Inadequate oversight can lead to serious liability under the Employee Retirement Income Security Act. In practice, failing to monitor investment options, letting fees spiral or missing forms can all trigger regulatory consequences.
Delayed deposit of the money withheld from employees’ paychecks into the 401(k) account. The Department of Labor mandates that, for small plans with fewer than 100 participants, contributions must be deposited within seven business days of being withheld.
Missing annual filings and nondiscrimination testing.
Make sure specific people or providers are formally responsible for required oversight tasks so nothing falls through the cracks.
Implement regular reviews of fees, investment lineup and provider disclosures.
Consider outsourcing to independent experts like a trusted certified professional employer organization (CPEO) to lighten your load and reduce risk.
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Even with a solid plan design, poor 401(k) administration can undermine results and, in some cases, result in noncompliance.
Failing to follow your own plan document. Examples include mishandling eligibility, vesting or contribution rules;
Missing eligibility notices or annual filings;
Depositing employee contributions late; and
Letting plan documents lapse.
Ensure your record‑keeper or third-party administrator has a strong track record. Set up agreements outlining services to be provided and document timelines for deferral deposits, eligibility audits and annual notices.
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Many small businesses underestimate the impact of embedded fees in their plan structure – especially when selecting a template plan or provider that isn’t well-versed in serving smaller firms.
High fees not only diminish participant returns but also raise fiduciary risk for the employer.
Benchmark your total cost (include recordkeeping expenses, investment fees and administrative costs) against similarly sized plans. Ask your provider for fee transparency. If the fee structure looks opaque, shop around.
A 401(k) plan design that made sense a few years ago may not fit your current business needs. Changes in workforce size, compensation structure and industry regulation create new demands.
Conduct an annual plan review. Ask and answer questions such as: Are participation rates acceptable? Are match formulas motivating? Are we on budget? Are the provider services meeting expectations? Use the review to adjust terms, vesting or contributions as needed.
Beyond operations, communication is key. Employees often don’t understand when they become eligible, how match formulas work or what the vesting schedule is.
These knowledge gaps reduce participation and increase frustration.
Communicate clearly and often with employees about how to enroll, when the match applies and what vesting means. Use multiple channels, including email, employee newsletters, printed brochures, personal or departmental meetings, posters in staff areas and others, to provide information and understand and respond to employee questions.
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Offering a workplace retirement plan is a powerful way to attract and retain employees—but it also introduces ongoing compliance and administrative responsibilities. Without proper oversight, small issues in plan administration, fiduciary monitoring or plan design can quickly become costly compliance problems.
Strong 401(k) compliance requires regular review, clear processes and experienced support. Employers who take a proactive approach reduce risk, improve plan performance and create a more valuable benefit for their workforce.
Axcet HR Solutions helps small and mid-sized businesses manage 401(k) administration, compliance responsibilities and employee benefits with confidence. Our experienced team works alongside employers to reduce administrative burden while helping ensure retirement plans remain compliant and effective.
Contact Axcet HR Solutions to learn how we can help support your 401(k) compliance and employee benefits strategy.
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