The Rosenbaum Law Firm P.C. Blog

Every football team needs a backup quarterback. You hope you never need him, but you better have one ready because eventually the starter is going to miss a play, a game, or maybe a season.

Your 401(k) plan needs the same thing.

I’ve seen too many plan sponsors where one employee knows everything about the 401(k) plan. They know the payroll process, when contributions are deposited, who the TPA contact is, where the documents are located, and what needs to be sent for annual testing.

Then that person quits.

Suddenly, nobody knows anything.

The problem with a 401(k) plan is that the clock doesn’t stop because your benefits person left the company. Payroll still has to run. Employee deferrals still need to be deposited timely. Eligibility still has to be determined. Distributions and loans still need attention. Annual testing and Form 5500 deadlines aren’t going anywhere.

That’s why every plan sponsor needs a backup quarterback.

At least one other employee should understand the basic administration of the plan. Important procedures should be written down. Provider contacts should be available to more than one person. Plan documents, amendments, policies, committee minutes, and important correspondence should be stored somewhere accessible to the appropriate people.

Cross-training isn’t just an HR issue. For a 401(k) plan, it’s risk management.

Your backup doesn’t need to know every detail that your primary plan administrator knows. They need to know enough to keep the plan operating and know whom to call when they don’t know the answer.

Tom Brady rarely missed a game, but the Patriots still carried backup quarterbacks.

Your 401(k) plan should too.

Every year, your TPA probably asks you for census information, and every year, someone at your company probably treats it like another annoying administrative task.

It isn’t.

The census is more important than you think because so much of your 401(k) plan’s annual compliance work depends on the information you provide.

Dates of birth. Dates of hire. Termination dates. Hours. Compensation. Ownership. Employee classifications. Deferrals. Employer contributions. All of that information can affect testing and plan administration.

Garbage in, garbage out.

Your TPA can be the greatest TPA in the world, but if you give them incorrect information, they’re going to produce results based on incorrect information. A missing employee could create a coverage issue. Incorrect compensation could affect allocations. Wrong ownership information could affect highly compensated or key employee determinations. A bad hire date could hide an eligibility problem.

The dangerous part is that the results can look perfectly legitimate.

A compliance test doesn’t necessarily flash a giant warning sign saying the census information was wrong. The test simply works with the information provided.

That’s why plan sponsors should have a process for reviewing census data before sending it to their TPA. Don’t simply download something from payroll and assume it’s correct.

Compare the information against HR records. Make sure terminated employees are included when required. Identify owners and family relationships. Explain unusual employment situations. If you acquired a company or added a related business, tell your TPA.

Your annual census isn’t busywork.

It’s the foundation for much of your plan’s compliance work.

If the foundation is wrong, everything built on top of it might be wrong too.

Your 401(k) plan document might say one thing while your payroll system does something completely different.

That’s a problem.

One of the most overlooked areas of 401(k) plan administration is the definition of compensation. Your plan document specifies what compensation is used for salary deferrals, matching contributions, profit-sharing contributions, and other plan purposes.

Payroll has to follow those definitions.

Maybe bonuses are included. Maybe certain fringe benefits are excluded. Maybe commissions count. Maybe they don’t. The answer isn’t what somebody in payroll thinks is reasonable. The answer starts with what the plan document says.

I’ve seen compensation mistakes that lasted for years because nobody compared the payroll setup with the actual terms of the plan.

That’s how operational failures happen.

The plan sponsor assumes payroll knows what the document says. Payroll assumes the TPA configured everything correctly. The TPA assumes the sponsor is administering payroll according to the document.

Everyone assumes, and nobody checks.

Then somebody eventually discovers that deferrals or matching contributions were calculated using the wrong compensation.

Now you may have corrections, additional employer contributions, earnings calculations, participant communications, and legal expenses over something that could have been prevented with a simple review.

Plan sponsors should periodically compare their payroll configuration against the plan document, especially after adopting a new plan, changing payroll providers, amending the plan, or changing compensation practices.

Your plan document isn’t something you sign and throw into a drawer.

It’s the instruction manual for operating your plan.

If the plan document and payroll aren’t speaking the same language, eventually you’re going to have a communication problem.

And with a 401(k) plan, communication problems usually cost money.

The number of 401(k) millionaires has reached another record, with Fidelity reporting 769,000 accounts worth at least $1 million.

Good.

I love stories like this because they prove something I’ve been saying for years: when it comes to retirement savings, boring works.

Most of these people didn’t become 401(k) millionaires because they found the next Nvidia, traded cryptocurrency at exactly the right moment, or discovered some secret investment strategy that nobody else knew about.

They saved. They kept saving. They stayed invested. Their employers contributed. The market went up over time.

That’s basically it.

The average employee contribution rate at Fidelity reached a record 9.6%, and when employer contributions are added, the total savings rate was 14.4%. More than 80% of participants contributed enough to receive their full employer match.

That’s the story.

I always get nervous when the retirement plan industry becomes obsessed with the latest shiny object. Crypto. Private equity. Alternative investments. Managed accounts. Whatever somebody is trying to sell this week.

Meanwhile, hundreds of thousands of ordinary participants became millionaires doing something incredibly unexciting.

They participated in their 401(k) plan.

Of course, $1 million isn’t some magical retirement number. Some people will need more and others will need less. And the average 401(k) balance is still only about $155,800, so we shouldn’t pretend every American worker is suddenly ready for retirement.

But 769,000 401(k) millionaires demonstrate what the system can accomplish.

A good 401(k) plan doesn’t need to be exciting. It needs reasonable investments, reasonable fees, good plan design, an employer willing to contribute, and participants willing to save consistently for a long period of time.

Retirement planning isn’t supposed to be exciting.

Sometimes boring is exactly what makes people rich.

Every retirement plan provider seems to have amazing technology.

At least that’s what the sales presentation says.

There are dashboards, mobile apps, payroll integrations, artificial intelligence, automated enrollment, participant engagement tools, and portals that supposedly do everything except make your morning coffee.

Technology is important. I’m certainly not suggesting otherwise.

The problem is that providers sometimes confuse having great technology with providing great service.

Most plan sponsors don’t wake up in the morning excited about their recordkeeper’s new dashboard. They want payroll contributions deposited correctly. They want distributions processed. They want their Form 5500 completed. They want compliance testing done.

Most importantly, when something goes wrong, they want someone to answer the phone.

That’s where technology suddenly becomes very important.

A payroll integration that works perfectly 99% of the time is wonderful. What happens during that other 1%?

Does the provider have someone who can actually fix the problem, or does the plan sponsor get a support ticket and an automated email promising a response within three business days?

Technology should make service better. It shouldn’t replace service.

I’ve seen providers spend enormous amounts of money developing technology while cutting back on the experienced employees who actually understand retirement plans. That’s like buying a Ferrari and getting rid of the mechanic.

Eventually, something breaks.

The best technology in the retirement plan business is technology backed by knowledgeable people. Automation can eliminate repetitive work and reduce errors, but there will always be situations that require judgment, experience, and somebody willing to take responsibility.

Plan sponsors aren’t buying a portal.

They’re buying a service.

Technology can help you deliver that service better, faster, and more efficiently.

Just don’t make the mistake of believing that the technology itself is the service.

There is always someone willing to do it cheaper.

That’s why I’ve never understood retirement plan providers who build their entire business around being the lowest-priced option.

Price matters. I’m a flat-fee ERISA attorney, so I’m certainly not suggesting that providers should charge whatever they want. Clients deserve fair and transparent pricing.

But there is a difference between being competitively priced and being cheap.

Retirement plan administration requires knowledgeable employees, good technology, continuing education, insurance, cybersecurity, compliance resources, and enough staffing to actually service clients.

All of that costs money.

When a TPA continually underprices its services, something eventually has to give.

Maybe employees are handling too many plans. Maybe experienced administrators are replaced with cheaper, inexperienced staff. Maybe emails take longer to answer. Maybe compliance work gets rushed. Maybe the owners simply discover that they’re working twice as hard for half the profit.

None of those are great outcomes.

I’ve also seen providers afraid to raise fees on longtime clients. A plan may have been priced appropriately ten years ago, but the workload, regulatory environment, staffing costs, and complexity of the business have changed dramatically since then.

You can’t run a 2026 business on 2016 pricing forever.

Being the cheapest provider can certainly win business. The problem is keeping that business while providing the level of service you promised.

There will always be prospects whose primary concern is price. If someone wants to leave you because another provider is $500 cheaper, they probably weren’t very loyal to begin with.

Compete on service. Compete on expertise. Compete on responsiveness. Compete on making the plan sponsor’s life easier.

Fair pricing matters.

Being the cheapest isn’t a competitive advantage if you can’t afford to provide the service you’re selling.

One of the biggest mistakes retirement plan providers make is believing that every client is worth saving.

They’re not.

I understand why providers obsess over retention. Losing clients doesn’t look good. Nobody wants to explain why ten plans left last year. Salespeople especially hate losing accounts because they worked hard to bring them in.

But retention for the sake of retention is stupid.

Some clients don’t pay their bills. Some clients ignore every request for information until the last possible second and then blame you when something isn’t completed on time. Some clients abuse your employees. Others continually create compliance problems because they refuse to follow instructions.

Then there are clients who simply aren’t profitable.

If a client generates $5,000 in annual revenue but requires $15,000 worth of your staff’s time, that’s not a client. That’s a charity.

Providers need to periodically look at their client base and determine which relationships actually make sense. That doesn’t mean firing every difficult client. Retirement plans are complicated, and good clients can occasionally be demanding.

The issue is whether the relationship is consistently bad for your business.

I’ve always believed that one of the best business decisions I ever made was understanding that I don’t need every potential client. The wrong client can consume the time and energy that should be devoted to the right ones.

There is also a morale issue. Nothing frustrates good employees more than management allowing a terrible client to continually mistreat them because management is afraid of losing the revenue.

Sometimes losing a client isn’t a failure.

Sometimes it’s addition by subtraction.

When business owners establish a 401(k) or profit-sharing plan, one of the first questions they usually ask is: “How much can I put away?”

I understand.

The tax deduction and retirement contribution are often major reasons they established the plan in the first place.

But designing a retirement plan solely around maximizing the owner’s contribution is like buying a car based entirely on how fast it can go without asking what it costs or whether you can actually drive it.

There is more to plan design than the owner’s contribution.

You have employees.

Coverage testing matters. Nondiscrimination testing matters. Eligibility matters. Employer contribution costs matter. Safe harbor contributions may matter.

I’ve seen plan designs that look fantastic on paper because the owner can receive a substantial contribution. Then the employer discovers what they have to contribute for everyone else.

Suddenly, that fantastic plan design isn’t so fantastic.

Good plan design requires understanding the entire workforce. That includes compensation, ages, ownership, job classifications, turnover, related businesses, and the employer’s objectives.

It also requires looking beyond this year.

Maybe the demographics work perfectly today. What happens when you hire ten employees next year? What happens when another owner joins? What happens when you acquire another company?

A retirement plan should be designed around the business, not simply around one owner’s desired contribution.

That’s why plan design should involve conversations between the employer, TPA, financial advisor, accountant, and ERISA counsel when necessary.

There is nothing wrong with wanting to maximize the owner’s contribution. That’s often one of the biggest benefits of sponsoring a retirement plan.

Just remember that the owner isn’t the only participant in the plan.

Sometimes the most important number isn’t how much the owner can contribute.

It’s what getting that contribution is going to cost everyone else.

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A typical 401(k) plan may have a TPA, recordkeeper, financial advisor, payroll provider, accountant, investment manager, and ERISA attorney.

That’s a lot of cooks in the kitchen.

The problem isn’t having multiple providers. Each provider can play an important role.

The problem is when the plan sponsor assumes that somebody else is handling something when nobody actually is.

The TPA thinks payroll is handling it. Payroll thinks the recordkeeper is handling it. The recordkeeper thinks it’s the TPA’s responsibility. Meanwhile, the financial advisor assumes everyone else has it covered.

Then a deadline gets missed.

One of the biggest mistakes plan sponsors make is failing to understand exactly what each provider does and, more importantly, what they don’t do.

Service agreements matter. Engagement letters matter. Understanding the division of responsibilities matters.

Just because you hired several competent providers doesn’t mean every responsibility has been assigned to someone.

There can also be overlap. Two providers may believe they’re responsible for the same task, while another important task belongs to nobody.

Ultimately, the plan sponsor remains responsible for overseeing the plan. You can’t simply assemble a group of providers and assume they’ll coordinate everything among themselves.

That’s why I believe every plan sponsor should periodically sit down with their providers and review responsibilities.

Who handles eligibility? Who calculates contributions? Who prepares notices? Who monitors deposits? Who handles distributions and loans? Who is responsible for government filings?

Get the answers before there’s a problem.

Having several cooks in the kitchen can produce a great meal when everyone knows their job.

When they don’t, somebody eventually burns dinner.

With a 401(k) plan, that burned dinner can become a costly compliance problem.

One of the biggest problems with administering a 401(k) plan is that sometimes all the knowledge about the plan resides with one employee.

Then that employee quits.

Suddenly, nobody knows how contributions are transmitted, who sends the census to the TPA, where the plan documents are located, or even who the contacts are at the recordkeeper.

I’ve seen it happen too many times.

A plan sponsor relies on one HR or payroll employee for years. That employee knows everything about the plan, but very little of that knowledge is documented. When they leave, their institutional knowledge walks out the door with them.

That’s when mistakes happen.

Payroll contributions can be delayed. Eligibility dates can be missed. Notices aren’t distributed. Provider requests get ignored because they’re sitting in an email account nobody is monitoring.

A 401(k) plan shouldn’t depend on one employee’s memory.

Plan sponsors should have written administrative procedures covering the basic operation of the plan. Who handles payroll contributions? Who reviews eligibility? Who communicates with the TPA? Who approves distributions? Where are important plan records maintained?

There should also be a backup employee who understands these responsibilities.

Cross-training isn’t exciting, but neither is explaining to the Department of Labor why participant contributions weren’t deposited because Susan from payroll left three months ago.

Providers can help with transitions, but ultimately, the plan sponsor is responsible for making sure someone is minding the store.

Employees leave. They retire. They get promoted. Sometimes they get hit by the proverbial bus.

Your 401(k) plan should be able to survive any of those events.

If the entire administration of your retirement plan depends upon one person’s memory, you don’t have a system.

You have a future problem.