Common 401(k) Compliance Mistakes and How to Avoid Them

Managing a 401(k) retirement plan involves a variety of complex responsibilities. Ensuring compliance with regulations from the IRS, Department of Labor (DOL), and ERISA is essential—not only to avoid penalties but also to make sure the plan benefits your employees as intended. At LSC Financial, we help employers recognize common compliance issues and take proactive steps to keep their retirement plans efficient, compliant, and valuable.

Why 401(k) Compliance Is Essential

A well-managed 401(k) plan plays a crucial role in supporting employee financial wellness and retention. However, it also comes with significant fiduciary duties. Non-compliance can result in:

• IRS penalties and required corrections

• DOL investigations or audits

• Legal claims from plan participants

• Damage to your company’s reputation and loss of employee trust

By understanding where compliance mistakes typically happen—and how to avoid them—you can better protect your plan and your business.

1. Late or Inaccurate Contribution Deposits

A common compliance issue is the delay or mishandling of employee contribution deposits. Contributions must be deposited as soon as administratively feasible, generally within a few business days after payroll.

How to Avoid This:

• Set up a reliable, automated process for payroll-to-plan deposits

• Regularly review deposit timing to ensure accuracy

• Perform internal audits to catch and correct errors promptly

2. Failure to Pass Non-Discrimination Testing

401(k) plans are required to pass ADP and ACP non-discrimination tests annually, which prevent the plan from disproportionately benefiting highly compensated employees (HCEs). Failing these tests may lead to refunds and other corrective actions.

How to Avoid This:

• Promote participation among non-HCE employees

• Consider adopting a Safe Harbor 401(k) plan to automatically satisfy testing requirements

• Partner with LSC Financial to monitor and adjust contributions throughout the year

3. Not Following the Plan Document

The plan document outlines essential elements such as eligibility, contributions, and vesting schedules. Operating outside the terms of the plan document—intentionally or unintentionally—can lead to serious compliance violations.

How to Avoid This:

• Conduct an annual review of your plan document to ensure proper adherence

• Train HR and payroll staff thoroughly on plan requirements

• Schedule regular plan compliance reviews with LSC Financial

4. Missing Required Participant Notices

Federal law mandates timely delivery of important disclosures, including:

• Summary Plan Descriptions (SPD)

• Fee disclosures

• Safe Harbor and Automatic Enrollment notices

Failure to provide these notices on schedule can result in fines and regulatory penalties.

How to Avoid This:

• Maintain a compliance calendar to track all notice deadlines

• Use automated tools to distribute and document delivery of notices

• Keep comprehensive records of all communications with participants

5. Excessive Plan Fees

Though high fees may not directly violate regulations, excessive or hidden charges can expose fiduciaries to legal risk and reduce participant satisfaction.

How to Avoid This:

• Benchmark your plan fees annually against industry standards

• Review investment expenses and administrative costs periodically

• Use LSC Financial’s expertise to evaluate providers and negotiate better pricing

6. Inadequate Monitoring of Service Providers

Plan sponsors must oversee third-party administrators (TPAs), recordkeepers, and investment managers. Failing to monitor these providers can lead to errors and fiduciary liability.

How to Avoid This:

• Conduct regular performance reviews with all service providers

• Document provider communications and decisions thoroughly

• Engage LSC Financial for independent oversight and fiduciary support

Best Practices to Maintain 401(k) Compliance

To stay compliant:

• Perform annual plan reviews to identify and address potential issues early

• Keep detailed documentation of all plan-related activities and decisions

• Implement employee education initiatives to encourage participation

• Work with LSC Financial for expert fiduciary guidance and ongoing plan management

Conclusion

Avoiding compliance pitfalls in your 401(k) plan is vital not just for preventing penalties but for protecting your business and supporting your employees’ financial futures. By staying informed, documenting your processes, and partnering with experienced professionals, you can keep your plan compliant and effective.

LSC Financial provides the knowledge, tools, and support necessary to keep your 401(k) plan running smoothly. Contact us today to schedule a thorough compliance review and enhance your company’s retirement program.