The Rosenbaum Law Firm P.C. Blog

Most 401(k) plan problems do not start in a conference room.

They start in payroll.

The payroll department controls much of the information that determines whether the plan operates correctly. Compensation, deferral elections, eligibility dates, bonuses, overtime, commissions, ownership information, and contribution amounts all flow through payroll.

One bad code can create a mess.

I have seen plans where certain bonuses were improperly excluded from deferrals. Employees became eligible but were never added to payroll. Deferral percentage changes were not implemented. Loan repayments were missed. Employees received contributions based on the wrong compensation.

Sometimes those mistakes continue for months or even years.

Plan sponsors often assume payroll is simply an administrative function. For retirement plans, it is much more than that. Payroll is one of the most important compliance systems the sponsor has.

The problem is that payroll employees are not always given the plan document or trained on the plan’s rules. They may know how to run payroll perfectly while having no idea which compensation is included under the 401(k) plan or when a new employee becomes eligible.

That disconnect can become expensive.

Corrections may require additional employer contributions, lost earnings, participant notices, amended filings, and professional fees. What looked like a small payroll mistake can become a significant compliance project.

Plan sponsors should regularly compare payroll practices against the plan document. Compensation codes should be reviewed. Eligibility procedures should be tested. Deferral changes should be monitored. Someone should verify that contributions are transmitted correctly and on time.

Your payroll department does not need to become an ERISA law firm.

But it does need to understand the rules it is responsible for administering.

Because when payroll breaks, the 401(k) plan usually breaks with it.

The retirement plan industry loves talking about the future.

Artificial intelligence. Managed accounts. Financial wellness. Personalized participant experiences. Predictive analytics. Enhanced cybersecurity. Better mobile apps. There is always another product that is going to revolutionize the 401(k) plan.

Meanwhile, the plan sponsor is still waiting for someone to answer an email from Tuesday.

There is nothing wrong with innovation. Providers should improve their technology and develop new services. But there is something strange about constantly selling tomorrow when basic problems today remain unresolved.

I’ve sat through enough provider presentations where tremendous attention is paid to whatever the latest industry trend happens to be. The presentation looks terrific. The graphics are impressive. Everyone talks about the future of retirement.

Then the client signs on and discovers that getting a simple operational question answered requires three emails and two escalations.

That is where the disconnect occurs.

Plan sponsors don’t live in the provider’s marketing presentation. They live in payroll deadlines, participant questions, compliance issues, contribution problems, and day-to-day administration. Those things may not sound as exciting as artificial intelligence, but they are what actually determine whether the sponsor thinks the provider is doing a good job.

Providers sometimes forget that innovation is only valuable when the foundation is solid.

Before selling the sponsor another sophisticated tool, make sure the basic service model works. Make sure calls are returned. Make sure emails are answered. Make sure payroll problems are resolved. Make sure somebody actually knows the client’s plan.

There will always be another industry trend coming around the corner. Providers should embrace the good ones.

But don’t spend so much time selling the future that you forget about the client standing in front of you today.

Because that client may not be around tomorrow.

One of the most common things I hear when a retirement plan problem is discovered is, “Nobody told us.”

The recordkeeper never mentioned it.

The TPA never explained it.

The adviser never brought it up.

That may explain how the problem happened, but it does not necessarily make the problem disappear.

Plan sponsors rely heavily on providers, and they should. Retirement plans are complicated, and sponsors need professionals who understand administration, investments, compliance, payroll integration, and fiduciary responsibilities.

But hiring providers does not mean the sponsor can completely stop paying attention.

At the end of the day, the employer is still the plan sponsor. The sponsor signs documents. The sponsor makes fiduciary decisions. The sponsor is responsible for making sure the plan operates according to its terms.

That is why “nobody told us” is such a dangerous mindset.

If a sponsor does not understand something, ask. If a provider gives an answer that does not make sense, ask again. If there is a major corporate transaction, payroll change, ownership change, or workforce restructuring, make sure the retirement plan professionals know about it.

Providers cannot advise on facts they were never given.

Sponsors also need to understand what each provider is actually responsible for. The adviser may not handle compliance. The TPA may not monitor payroll deposits. The recordkeeper may process transactions without determining whether the underlying data is correct.

Those gaps matter.

Good plan governance requires active participation by the sponsor. You do not need to know every section of ERISA or the Internal Revenue Code. You do need to know enough to recognize when questions should be asked.

Your providers are there to help you.

But responsibility cannot simply be handed away.

When something goes wrong, “nobody told us” may be understandable.

It is rarely a complete defense.

The retirement plan industry loves dashboards. Every few years, there is another portal, another app, another reporting tool, and another piece of technology that is supposed to transform the plan sponsor experience. The problem is that many plan sponsors aren’t asking for another dashboard. They’re asking for someone to answer the phone.

Technology has its place. A good portal can save time. Clean reporting can make a sponsor’s life easier. Automated processes can reduce mistakes. But technology should support service, not replace it. Too many providers act as if adding another layer of technology somehow makes up for slow response times, poor follow-up, or an inability to solve basic problems.

I’ve dealt with plan sponsors who have access to beautiful websites filled with charts, reports, educational tools, participant data, and all sorts of bells and whistles. Yet when there is a payroll issue, a distribution problem, or a plan correction that actually matters, suddenly nobody knows who owns the problem.

That is where providers lose clients.

Plan sponsors don’t judge a provider solely by how impressive the technology looks during a sales presentation. They judge the provider by what happens when something goes wrong. Can they reach somebody? Does that person understand the issue? Does somebody take responsibility for getting it fixed?

The industry sometimes forgets that retirement plans are complicated enough already. Sponsors don’t necessarily want more features. They want fewer headaches.

Before a provider spends millions developing the next dashboard, maybe it should spend some of that money making sure its service team is properly staffed, trained, and empowered to solve problems.

A dashboard is a tool. It is not a relationship.

And no amount of technology will ever replace good service.

Automation has made retirement plan administration faster and more efficient. Payroll files can be transmitted automatically. Contributions can be processed faster. Participant notices can be delivered electronically. Routine transactions can happen without anyone touching them.

That is all good—until automation becomes an excuse for bad service.

Too often, providers design systems that work perfectly when everything fits neatly inside the box. The problem is that retirement plans don’t always fit inside the box. Payroll mistakes happen. Ownership changes. Participants have unusual circumstances. Plans merge. Companies get acquired. Someone eventually has a problem that the computer wasn’t programmed to handle.

That is when you find out whether the provider actually has a service model or simply has software.

I’ve seen situations where the answer to a problem becomes, “The system won’t allow it.” That might explain why something happened, but it doesn’t solve the problem. The sponsor doesn’t care that the computer says no. They want somebody who understands the plan and can figure out what needs to happen next.

Automation should eliminate repetitive work so talented people can spend more time handling complicated situations. Instead, some providers seem to use automation as a justification for reducing service staff and pushing sponsors toward self-service.

There is nothing wrong with self-service when the task is simple. The problem is forcing a sponsor to navigate menus, portals, chatbots, and ticket systems when they actually need a knowledgeable person.

The retirement plan business is still a people business.

Technology should help providers serve clients better. It should never become a wall between the provider and the plan sponsor.

If your automated system works great 95% of the time, that’s wonderful. Your reputation will probably be determined by what your people do during the other 5%.

When people hear the words fiduciary breach, they tend to think about something dramatic. Maybe an investment scandal. Maybe excessive fees. Maybe somebody stealing plan assets.

Most plan sponsor problems are a lot less exciting.

They come from indifference.

The plan committee hasn’t met in two years. Nobody has reviewed the investment lineup. The payroll process has never been checked. The plan document sits in a folder that nobody reads. Participants complain about problems, but everyone assumes the recordkeeper will handle them.

That is how little problems become big ones.

ERISA does not require plan sponsors to be perfect. It does require them to act prudently. Prudence is a process. It means paying attention, asking questions, documenting decisions, and following up when something does not look right.

Too many sponsors treat the 401(k) plan as something that runs in the background. They hired a TPA. They hired an adviser. They hired a recordkeeper. They assume those providers are watching everything.

That is a dangerous assumption.

Providers can help administer the plan, but they cannot replace the sponsor’s responsibility to oversee it. If the sponsor never asks questions, never reviews reports, and never checks whether procedures are actually being followed, problems can sit unnoticed for years.

The biggest fiduciary risk may not be greed or bad intentions. It may simply be neglect.

Most sponsors care about their employees and want to run a good plan. The problem is that good intentions are not a compliance procedure.

The best protection is not complicated. Pay attention. Meet regularly. Review the plan. Ask questions. Document what you do.

Indifference is easy.

Unfortunately, correcting the problems it creates usually is not.

If an employee is sending hundreds of dollars a month toward student loans, that money has to come from somewhere. Very often, it comes out of retirement savings.

EBRI research has consistently shown that student debt can materially affect 401(k) contribution behavior and retirement preparedness. That should not surprise anyone. Younger employees are trying to juggle rent, food, insurance, credit cards, student loans, and everything else life throws at them. The 401(k) contribution becomes the easiest thing to reduce because retirement feels 30 or 40 years away.

That is why the SECURE 2.0 student loan matching provision was such an interesting development. Employers can treat qualified student loan payments as if they were elective deferrals for purposes of making matching contributions. In theory, an employee can keep paying down student debt without completely sacrificing the employer contribution to the retirement plan.

I like the concept because it recognizes reality.

For years, the retirement plan industry has told employees they should save more. That is easy advice to give when you are not the person staring at a student loan payment every month.

Plan sponsors should at least consider whether student loan matching makes sense for their workforce, particularly if they employ younger professionals carrying substantial education debt. It will not be appropriate for every employer, and cost certainly matters.

But the larger lesson is that retirement benefits cannot be designed in isolation.

Financial wellness is interconnected. Student debt, emergency savings, credit cards, housing costs, and retirement savings all compete for the same paycheck.

You can design the greatest 401(k) plan in the world.

If employees cannot afford to contribute to it, the design really doesn’t matter.

One of the biggest mistakes I see plan providers make is believing that every prospect needs to become a client.

They don’t.

I’ve been running my own law practice since 2010, and one of the most important things I’ve learned is that some business isn’t worth having.

There are warning signs.

A prospect who complains endlessly about the previous provider may eventually complain endlessly about you. A prospect who argues over every dollar of your fee probably isn’t suddenly going to appreciate your value after they become a client. A prospect who refuses to provide information, misses deadlines, and then blames everyone else for the consequences isn’t likely to change because they signed your service agreement.

Sometimes you should walk away.

That’s difficult for providers because we’re conditioned to chase revenue. Salespeople have goals. Owners want growth. Every new plan adds assets, participants, or revenue.

But bad clients have costs that don’t always show up on a sales report.

They consume disproportionate amounts of staff time. They frustrate your employees. They create unnecessary emergencies. They argue about bills. They increase the possibility of mistakes because your staff is constantly dealing with fires that shouldn’t exist.

Worst of all, they can drive away good employees and distract you from good clients.

There is also a tendency to believe that a difficult prospect will somehow become easier once they’re onboarded. In my experience, the opposite is usually true. Dating is typically the best behavior you’re going to get. If the prospect is impossible during the sales process, imagine what happens after the honeymoon is over.

Growing your business isn’t simply about adding clients. It’s about adding the right clients.

Sometimes the best piece of new business is the business you were smart enough not to take.

Every plan provider wants to grow.

More plans. More assets. More participants. More revenue.

Growth is usually viewed as proof that you’re doing something right. The problem is that there is such a thing as growing too fast.

I’ve seen it happen with TPAs, advisers, recordkeepers, and other plan providers. They have a terrific year on the sales side, but operations can’t keep up.

Suddenly, emails aren’t being answered. Compliance work gets backed up. Employees who once handled a manageable caseload are drowning. Experienced employees leave because they’re burned out, and their replacements aren’t properly trained because nobody has time to train them.

The provider grew, but the service got worse.

That’s not successful growth.

The biggest problem is that deterioration doesn’t always happen immediately. You can add dozens or hundreds of new plans and celebrate the revenue while the cracks are forming underneath. Six months later, existing clients start complaining. A year later, they’re leaving.

Growth requires infrastructure.

If you’re adding business, you need enough people to service it. You need experienced managers. You need technology that actually improves efficiency rather than simply looking impressive during a sales presentation. Most importantly, you need to know how much work your employees can reasonably handle.

There is nothing wrong with saying you’re at capacity.

I’ve always believed that I’d rather do a good job for the clients I have than take on so much work that I can’t properly service anyone. Revenue is important, but reputation is more important because once you develop a reputation for lousy service, getting it back isn’t easy.

Plan providers spend enormous amounts of money trying to acquire new clients.

Sometimes they should spend a little more money making sure they can properly service the clients they just acquired.

Growth is great.

Growing beyond your ability to deliver isn’t growth.

It’s the beginning of a service problem.

I’ve been practicing ERISA law for a long time, and one thing that continues to amaze me is when a plan sponsor discovers a mistake that the plan provider should have caught.

The plan sponsor shouldn’t be your quality-control department.

Whether you’re a TPA, recordkeeper, payroll provider, adviser, or another service provider, the client is paying you because this is what you do for a living. They shouldn’t have to discover that an employee entered the plan late, that a contribution was calculated incorrectly, or that information didn’t properly transfer between payroll and the recordkeeper.

Mistakes happen. I make mistakes. Everyone does. The issue isn’t whether a provider will ever make a mistake. The issue is whether the provider has procedures designed to catch mistakes before the client does.

Too many providers rely on the plan sponsor to review reports without understanding that most sponsors don’t know what they’re supposed to be looking for. That’s why they hired you.

Quality control costs money. It requires experienced employees, proper procedures, checks and balances, and sometimes another set of eyes. That’s not wasted overhead. It’s part of providing the service you’re being paid to provide.

I’ve seen providers lose clients over errors that weren’t necessarily catastrophic. The real problem was that the client discovered the mistake first. Once that happens, the sponsor starts wondering what other mistakes haven’t been discovered.

That’s when confidence disappears.

Plan providers sell expertise. They sell service. Most importantly, they sell the comfort that someone knowledgeable is watching the plan.

If your client has to constantly check your work to make sure you’re doing your job correctly, you’re no longer providing that comfort.

You’re giving them another job.

And eventually, they may find another provider.