One of the most common and expensive mistakes in a 401(k) plan isn’t a complicated investment issue or a sophisticated compliance failure. It’s the employee who never enrolled.
Sometimes it’s because the employee was never offered the opportunity to participate. Sometimes payroll coded them incorrectly. Sometimes an eligibility date was missed during a period of rapid growth or employee turnover. Whatever the reason, the result is the same: a participant who should have been in the plan but wasn’t.
Plan sponsors are often surprised when they discover that a simple administrative oversight can require corrective contributions, lost earnings calculations, and significant time spent fixing the problem. What may seem like a minor clerical error can become a costly correction exercise.
The challenge is that these mistakes often go unnoticed for months or even years. An employee assumes they are participating because they completed onboarding paperwork. HR assumes payroll handled it. Payroll assumes someone else verified eligibility. Everyone assumes the process worked.
Then one day an employee checks their account and discovers there isn’t one.
The best way to avoid these problems is through process. Regular reviews of newly eligible employees, periodic payroll audits, and clear communication between HR, payroll, and plan providers can catch issues before they become expensive corrections.
Technology helps, but technology is only as good as the information entered into it. A system cannot fix a process that doesn’t exist.
I’ve seen sponsors spend thousands of dollars correcting mistakes that could have been prevented by spending fifteen minutes reviewing an eligibility report.
The employee who never enrolled is rarely the result of bad intentions. It’s usually the result of assumptions. In the retirement plan business, assumptions are often far more expensive than anyone expects.