The Rosenbaum Law Firm P.C. Blog

Many plan sponsors assume that a Department of Labor investigation begins with a deep dive into investments, participant complaints, or complex fiduciary issues. In reality, the first 15 minutes often tell an investigator a great deal about how a retirement plan is being managed.

The initial focus is typically on organization, documentation, and process.

Can the plan sponsor quickly produce plan documents, trust agreements, service provider contracts, committee minutes, and Form 5500 filings? Is there a clear understanding of who is responsible for plan administration? Are key records readily available?

A well-organized response sends an important message. It demonstrates that the plan sponsor takes fiduciary responsibilities seriously and has established procedures for managing the plan. Disorganized records, inconsistent answers, and missing documentation often raise concerns that additional operational issues may exist.

Investigators frequently review payroll and contribution procedures early in the process. Late employee deferral deposits remain one of the most common compliance failures identified by the Department of Labor. Sponsors should be prepared to explain how contributions move from payroll to the plan and who oversees the process.

The DOL is also interested in governance. Investigators may ask whether a retirement plan committee exists, how often it meets, whether decisions are documented, and how service providers are monitored. The goal is not to determine whether every decision was perfect. The goal is to determine whether a prudent process exists.

Many sponsors worry that a DOL investigation is a search for wrongdoing. More often, it is an examination of procedures and oversight.

The best preparation for a DOL investigation is not scrambling when a letter arrives. It is maintaining good records, documenting decisions, monitoring service providers, and following established procedures throughout the year.

In many cases, what a DOL investigator sees during the first 15 minutes sets the tone for everything that follows.

Most retirement plan providers dread participant complaints. A participant cannot access their account, believes their contribution is missing, questions a distribution, or claims they were improperly excluded from the plan. The initial reaction is often frustration because complaints create work and consume valuable time.

However, smart plan providers understand that participant complaints are often gifts.

Many operational failures are first discovered because a participant asks a question. A participant who notices a missing deferral may uncover a payroll issue. An employee who questions eligibility may reveal a plan administration error. A participant who challenges a distribution amount may identify a recordkeeping problem that would have otherwise remained undetected.

When participants raise concerns, providers should view those inquiries as opportunities to identify and correct issues before they become larger problems. A participant complaint that is addressed promptly may prevent a Department of Labor investigation, an IRS correction program filing, or a fiduciary breach claim.

The key is having a process. Complaints should be documented, investigated, and resolved consistently. Providers should avoid becoming defensive and instead focus on determining whether there is an underlying operational issue that requires attention.

The best plan providers do not treat complaints as annoyances. They treat them as valuable information. Participants interact with retirement plans every day and often notice problems before service providers, plan sponsors, or fiduciary committees do.

The next time a participant calls with a complaint, remember that they may be helping identify a problem before a regulator, auditor, or plaintiff’s attorney does. That is not a burden—it is an opportunity.

Retirement plan sponsors often use the terms “vendor” and “partner” interchangeably. They should not.

A vendor performs a service. A partner helps solve problems.

There is nothing wrong with being a vendor. Recordkeepers, TPAs, advisors, payroll providers, and other service providers all deliver important services. However, plan sponsors should understand the difference between a provider that simply completes assigned tasks and one that proactively helps manage risk and improve outcomes.

A vendor waits for instructions. A partner identifies issues before they become problems. A vendor focuses on fulfilling contractual obligations. A partner focuses on helping the plan succeed.

For example, when a provider discovers a late deferral issue, a vendor may simply point out the problem. A partner helps the plan sponsor understand the correction options, potential risks, and next steps. When a regulatory change occurs, a vendor may wait until asked for guidance. A partner communicates proactively and helps prepare for implementation.

Plan providers seeking long-term client relationships should strive to become trusted partners rather than interchangeable vendors. That requires responsiveness, communication, education, and a willingness to address difficult issues before they become crises.

From the plan sponsor’s perspective, the lowest-cost provider is not always the best value. The real value comes from working with professionals who understand the plan’s goals, anticipate challenges, and provide practical solutions.

In today’s competitive retirement plan marketplace, technology and pricing can often be replicated. Trust cannot. The providers that earn trust become partners, and those partnerships often last far longer than any service agreement.

Retirement plan providers spend a great deal of time searching for new business. They attend conferences, send marketing emails, make cold calls, and look for referral opportunities. While there is nothing wrong with prospecting, many providers overlook the most valuable source of future business sitting right in front of them.

Their existing clients.

The easiest sale is often the one that never feels like a sale at all. When clients trust you, appreciate your service, and believe you are looking out for their interests, they naturally become advocates for your business. They recommend you to colleagues, accountants, attorneys, payroll providers, and other business owners.

The problem is that many providers spend more time chasing prospects than taking care of current clients. They focus on winning new business while failing to strengthen the relationships they already have.

Over the years, many of the best opportunities I received came from existing clients. Not because I asked for referrals every week, but because I worked hard to solve their problems. People remember responsiveness. They remember competence. They remember the provider who answered the phone when something went wrong.

Trust creates referrals.

Cold marketing has its place, but referral business is different. When a prospect is introduced by a satisfied client, much of the credibility has already been established. The prospect starts the conversation with confidence because someone they trust has already vouched for you.

The retirement plan business remains a relationship business. Technology matters. Pricing matters. Expertise matters. But relationships still drive growth.

If you want more business, start by making sure your current clients receive outstanding service. Return calls promptly. Communicate clearly. Solve problems before they become crises. Earn trust every day.

The best source of new business is usually not the prospect you haven’t met. It’s the client you already have.

One of the biggest mistakes retirement plan providers make is hiring a new employee and assuming they will simply figure things out as they go. The retirement plan business is too complicated for that approach. Yet I have seen firms bring in bright, capable people and provide little more than a login, a desk, and a hope that someone will answer their questions.

Hope is not a training program.

The retirement plan industry is filled with technical rules involving ERISA, the Internal Revenue Code, payroll integration, plan documents, compliance testing, distributions, loans, and fiduciary responsibilities. Nobody walks into this business already knowing all of that. The best administrators, consultants, and relationship managers are developed through education, mentoring, and experience.

Every provider should have a training budget for new employees. That budget should include industry conferences, ASPPA education programs, webinars, professional publications, and internal mentoring. Training should not be viewed as an expense. It should be viewed as an investment in quality and client service.

I have worked at organizations where new employees received little formal training. The result was predictable. People developed bad habits, made avoidable mistakes, and struggled to advance professionally. Some employees spent years performing the same tasks without ever truly understanding why they were doing them.

Contrast that with firms that invest in education. Employees gain confidence, solve problems more effectively, and provide better service to clients. They also tend to stay longer because they see a path for professional growth.

As an attorney, I have continuing legal education requirements. I also spend time keeping up with legislative and regulatory developments. The retirement plan business changes constantly, and professionals who stop learning eventually fall behind.

The firms that treat training as an investment usually outperform the firms that treat it as an expense. That’s why every new retirement plan employee needs a training budget.

When plan sponsors think about retirement plan risk, they often focus on investment committees, financial advisors, or highly compensated executives. In reality, the employee who creates the greatest risk to a retirement plan is often someone far less visible.

It’s usually the person responsible for payroll.

Most retirement plan operational failures begin with payroll data. Incorrect hire dates can cause eligibility failures. Compensation entered incorrectly can result in missed deferrals or improper employer contributions. Delayed transmission of employee contributions can create prohibited transaction concerns. A simple payroll mistake can affect dozens of participants before anyone realizes there is a problem.

This isn’t a criticism of payroll personnel. In fact, payroll employees often carry an enormous compliance burden without realizing it. Retirement plans rely heavily on payroll systems to determine eligibility, calculate contributions, apply plan limits, and maintain participant records. When incorrect information enters the system, the error frequently spreads throughout the plan.

Many sponsors devote substantial attention to investment performance while paying little attention to payroll procedures. Yet most correction projects I encounter have nothing to do with investments. They involve payroll mistakes that resulted in corrective contributions, lost earnings calculations, and administrative headaches that could have been avoided with proper procedures and training.

That is why payroll should never be viewed as a back-office function. Payroll personnel are critical partners in maintaining retirement plan compliance. They need training, support, and regular communication with the plan’s advisors and administrators.

A retirement plan is only as accurate as the information that feeds it. Sponsors who understand that reality are far less likely to face costly correction programs later. The most dangerous employee in your 401(k) plan is usually not the executive making decisions. It is the employee unknowingly entering bad data into the payroll system.

When a plan sponsor learns that their retirement plan will be audited, the reaction is often the same. They start gathering documents, searching for reports, and preparing for requests from the auditor. While those tasks are important, they miss a key point. A retirement plan audit does not begin when the auditor arrives. It begins every day the plan operates.

The quality of an audit is often determined by the quality of a sponsor’s procedures throughout the year. Auditors review payroll records, participant transactions, eligibility determinations, distributions, loans, and employer contributions. If those items were handled correctly and documented properly when they occurred, the audit process tends to be straightforward. If they were not, the audit can become expensive and time-consuming.

One of the biggest mistakes sponsors make is treating compliance as an annual exercise. Compliance is really a year-round responsibility. Every payroll run, every new hire, every terminated employee, and every participant transaction creates information that may eventually be reviewed by an auditor. Missing records, inconsistent procedures, and undocumented decisions often become significant issues months or years later.

The sponsors that experience the fewest audit problems are usually not the sponsors that spend the most time preparing for the audit. They are the sponsors that maintain good processes throughout the year. They keep accurate payroll records, review plan operations regularly, and work closely with their service providers to identify issues before they become problems.

A successful audit is rarely the result of luck. It is usually the result of preparation, organization, and attention to detail. Plan sponsors should remember that by the time an auditor asks a question, the answer should already exist in the plan’s records. That’s why your retirement plan audit starts long before the auditor arrives.

Most plan sponsors worry about investment performance, participant complaints, cybersecurity, and government audits. What many don’t realize is that one of the most expensive mistakes a retirement plan sponsor can make often starts with a simple question that nobody bothers to ask:

“Who actually belongs in the plan?”

The answer is not always as obvious as it seems.

Under the Internal Revenue Code, businesses that are part of a controlled group or affiliated service group are generally treated as a single employer for qualified retirement plan purposes. While that sounds simple enough, the reality is anything but. The rules are complex, confusing, and often misunderstood by business owners, accountants, and even retirement plan providers.

When these rules are ignored, the consequences can be staggering.

The Employer You Forgot About

A common scenario involves a business owner who sponsors a 401(k) plan for one company while owning interests in other entities. Sometimes those entities are operating companies. Sometimes they are management companies. Sometimes they are medical practices, professional corporations, or consulting businesses.

The owner assumes that because one company sponsors the plan, the other companies don’t matter.

That assumption can be dangerous.

If those businesses are part of a controlled group under Code Section 414(b) or (c), or an affiliated service group under Code Section 414(m), the employees of those businesses generally must be considered when applying coverage and nondiscrimination rules.

The problem is that many sponsors don’t discover the issue until years later.

When Coverage Testing Becomes a Nightmare

Let’s assume a plan covers only the employees of Company A.

Unfortunately, Company B should have been included because it was part of the same controlled group.

Now all of Company B’s employees must be included when performing coverage testing.

What happens next is often ugly.

A plan that easily passed coverage testing suddenly fails. Employees who were never offered participation become excludable only if they satisfy the plan’s eligibility conditions. Highly compensated employee percentages change. Benefiting percentages change. Entire years of testing may need to be reconstructed.

The result is often corrective contributions for employees who never entered the plan but should have been considered during testing.

That bill can be enormous.

The Correction Nobody Budgeted For

I’ve seen sponsors spend years carefully managing plan expenses only to receive a correction proposal that dwarfs everything they ever saved.

The irony is that the sponsor wasn’t trying to do anything wrong.

They simply didn’t understand that another entity had to be included.

The IRS generally doesn’t care whether the mistake was intentional. If the plan failed coverage requirements, the failure has to be corrected.

Corrective contributions, lost earnings calculations, professional fees, legal fees, and compliance costs can quickly add up.

What looked like a minor ownership issue becomes a six-figure problem.

Affiliated Service Groups Are Even Worse

Controlled group rules are difficult enough. Affiliated service group rules can be even more confusing.

Many professional practices operate through multiple entities. Medical groups, law firms, accounting firms, engineering firms, and consulting organizations frequently create structures that were designed for operational or business reasons, not retirement plan compliance.

The affiliated service group rules were specifically created to prevent employers from splitting employees among multiple entities to avoid retirement plan coverage requirements.

The challenge is that many arrangements can trigger affiliated service group status without the owners realizing it.

A practice management company, administrative services company, or related professional entity can create issues that are not immediately obvious.

I’ve spent more than twenty-five years in this business and I still encounter situations where experienced professionals disagree about whether an affiliated service group exists.

That’s how complicated these rules can be.

Don’t Assume Your Payroll Company Is Checking

One of the most dangerous assumptions a sponsor can make is believing that somebody else has already reviewed the ownership structure.

Many payroll companies don’t do controlled group analyses.

Many recordkeepers don’t do controlled group analyses.

Many TPAs rely on information provided by the client.

If the sponsor never discloses related entities, nobody may ever ask the right questions.

Then years later, during an acquisition, audit, merger, plan termination, or due diligence review, the issue finally surfaces.

By then, the correction costs can be substantial.

The Best Time To Review Is Before There Is A Problem

The cheapest controlled group review is the one performed before the IRS, an auditor, or a buyer discovers an issue.

Every plan sponsor with multiple entities should periodically review ownership structures and business relationships.

The review becomes even more important when:

· New entities are formed.

· Ownership percentages change.

· Family members acquire interests in businesses.

· Professional practices create management companies.

· Businesses merge or acquire other companies.

· New retirement plans are established.

The cost of a review is usually insignificant compared to the cost of correcting years of failed coverage testing.

Final Thoughts

One of the most expensive words in the retirement plan business is “Oops.”

A controlled group or affiliated service group mistake often begins with an innocent misunderstanding and ends with corrective contributions that nobody expected to make.

Plan sponsors spend tremendous amounts of time worrying about market performance. In my experience, they should spend at least as much time worrying about qualification failures.

Markets go up and down.

A failed coverage test caused by a missed controlled group or affiliated service group member can produce a bill that is very real, very immediate, and very expensive.

That’s why every plan sponsor should periodically ask a simple question:

“Are we absolutely sure we’ve identified every employer that must be counted?”

If the answer isn’t a confident yes, it’s time to find out before the IRS, your auditor, or a buyer does it for you.

I recently read a survey showing that most Americans would prefer to solve Social Security’s financial problems by reducing benefits for affluent retirees rather than raising taxes on themselves or imposing across-the-board benefit cuts. My reaction was simple.

I’m not shocked. Not even a little.

If you’ve spent any time paying attention to politics or public policy, this result was entirely predictable. When people are presented with a choice between paying more themselves and asking someone else to pay more, they usually choose the second option.

The reality is that Social Security has a math problem. The system is projected to face significant funding shortfalls in the coming years, and policymakers eventually will have to make difficult choices involving taxes, benefits, retirement ages, or some combination of all three. Doing nothing isn’t a solution because doing nothing eventually leads to automatic benefit reductions.

What I found interesting about the survey was not that Americans want affluent retirees to absorb more of the burden. It was that even many higher-income respondents supported that approach.

Of course, the phrase “wealthy retiree” means different things to different people. To some people, it means a billionaire. To others, it means someone who worked for forty years, paid maximum Social Security taxes, saved diligently, and accumulated a comfortable retirement. That’s where these discussions become politically complicated.

As someone who spends his professional life dealing with retirement issues, I think the bigger problem is that Americans continue to believe there is a painless solution. There isn’t.

Every proposal involves winners and losers. Raise taxes and workers pay more. Raise the retirement age and future retirees work longer. Reduce benefits and retirees receive less. Means-testing shifts more of the burden to higher-income retirees. None of these options are politically pleasant.

The survey results don’t surprise me because Americans are behaving exactly as people always do. They want Social Security fixed. They just prefer that somebody else absorb most of the pain.

Unfortunately, Social Security’s finances don’t care about politics. Eventually, the math wins.

I recently read that financial literacy in America has fallen to its lowest level in a decade. Americans answered less than half of basic financial literacy questions correctly, and younger generations performed even worse. The numbers are concerning, but they don’t surprise me.

I’ve spent more than twenty-five years in the retirement plan business. If there is one thing I’ve learned, it’s that we often assume participants know more than they actually do. They don’t.

Many participants don’t understand compound interest. They don’t understand inflation. They don’t understand investment risk. They don’t understand the difference between a traditional pre-tax contribution and a Roth contribution. Most importantly, many don’t understand how much money they need to save to retire comfortably.

The retirement plan industry sometimes acts as if technology can solve every problem. We build better websites. We create mobile apps. We add calculators and interactive tools. Those things are helpful, but technology cannot overcome a lack of basic financial knowledge.

The reality is that many participants are making decisions without understanding the consequences. Some avoid participating because they believe they can’t afford to contribute. Others keep all their money in stable value or money market funds because they are afraid of market volatility. Still others take loans or hardship withdrawals without fully appreciating the long-term impact on retirement readiness.

This is why participant education remains so important.

For plan providers, financial literacy should not be viewed as someone else’s responsibility. Every enrollment meeting, every educational presentation, every participant call, and every communication represents an opportunity to help someone make a better financial decision.

The study also found that retirement-specific knowledge remains alarmingly low. That should concern every provider because defined contribution plans place significant responsibility on participants. The more responsibility participants have, the more important financial literacy becomes.

The retirement plan industry has spent decades focusing on plan design, investment menus, fees, and technology. Those issues matter. But none of them can fully compensate for a participant who lacks a basic understanding of personal finance.

Financial literacy is not a side issue. It is one of the foundations of retirement security.

If Americans are becoming less financially literate, the retirement plan industry needs to do a better job educating participants. Because at the end of the day, a great retirement plan only works if participants understand how to use it.