The 4 Areas Where a 401(k) Plan Commonly Breaks Down
The 4 Areas Where a 401(k) Plan Commonly Breaks Down
If your 401(k) doesn’t seem to be firing on all cylinders, there could be a multitude of causes, and one plan’s problem may not be exactly the same as any other plans problem.
These issues can occur for various reasons. Perhaps the plan wasn’t set up properly in the first place, or perhaps it’s not being monitored in a meaningful way. And in many cases, the problems aren’t obvious until something goes wrong — like a failed compliance test, frustrated employees, rising fees, or even an audit.
Although each plan is unique and may face a unique challenge, most problems tend to fall into four major categories: compliance, investments, participant engagement, and operations.
Let’s walk through each one.
1. Compliance Issues
Has anyone ever heard the word compliance and gotten excited? Seems unlikely but if there has, I’m not sure I want to meet that person. Regardless, 401(k) compliance does exist for a reason, and keeping your plan compliant is important.
A 401(k) is a regulated retirement plan governed by IRS and Department of Labor rules. That means there are processes, deadlines, and documentation requirements that need to be followed consistently.
The challenge is that many plans look compliant on the surface while quietly accumulating issues in the background.
Some examples:
The plan document was never updated properly after regulatory changes
Payroll wasn’t withholding contributions correctly
Employee deferrals were deposited late
Eligibility rules weren’t being followed consistently
Required notices were missed
There was no documentation showing that fiduciary decisions were being reviewed
I would say more often than not, the issue isn’t that someone intentionally did something wrong — it’s simply that no one had a process in place to monitor everything. This is where fiduciary oversight becomes important. A thorough and consistent process helps reduce the likelihood that problems build up unnoticed over time.
Because once compliance issues are discovered, fixing them can become expensive, time-consuming, and stressful for the employer.
2. Investment Problems
Investments… perhaps the polar opposite of compliance in terms of how exciting it is. After all, the investments within the 401(k) are what drives potential growth, which is the primary reason why people sign up for a 401(k) in the first place.
But just like everything in life, there are good, bad and average versions of things. Investments are no exception. Do your participants have enough investment options? Or perhaps, do they have too many and they’re feeling overwhelmed? Are the investments not performing well against their peers? Maybe their expense ratios are too high, or they aren’t diversified enough.
The list goes on. This is yet another area that should have a consistent process behind it to ensure the investment line up is of high quality and remains that way.
This doesn’t mean plans should constantly replace investments based on short-term performance. In fact, that can create even more problems. But there should absolutely be a documented process for reviewing the investments on a regular basis and determining when a replacement may be appropriate, and why.
A strong investment process typically looks at things like:
Long-term performance relative to peers and benchmarks
Fees and overall value
Manager consistency
Risk characteristics
Overlap within the lineup
Whether participants are actually using the options effectively
The goal isn’t to create the “perfect” lineup. It’s to create an intentional, diversified lineup that employees can realistically navigate and use. Just as importantly, it’s to create a documented process for arriving at those decisions.
3. Low Participant Engagement
Having a compliant plan and an excellent investment lineup is a moot point if none of your employees are participating. After all, the 401(k) was set up with them in mind.
Low engagement from employees can show up in several ways; from low participation rates to low contribution rates, or too many people sitting in cash, or taking loans too frequently.
There are two main ways to solve this issue: Enabling auto-enrollment, and hiring an advisor who actually engages with your employees in a meaningful way. Either can be effective, both can be even more effective.
Most employees aren’t spending their evenings researching asset allocation strategies or reading plan disclosures. They’re busy working, raising families, paying bills, and managing everyday life.
That’s why education and communication matter so much.
The most effective plans tend to create ongoing engagement instead of treating enrollment as a one-time event. This can be in the form of employee education meetings, one-on-one guidance, and financial planning resources.
A retirement plan can become a very valuable employee benefit — but only if employees actually understand and use it.
4. Operational Issues
Finally, there’s the operational side of the plan. Just the terminology alone can be enough to overwhelm the calmest person. Plan sponsor, plan trustee, plan administrator, recordkeeper, advisor, bundled services, unbundled services…
With all these moving parts and complexities, there often ends up being high administrative costs, unclear fee structures, inefficiencies or lack or coordination between providers. Sometimes it can just be lousy customer service, causing your employees to not want to bother with it at all.
In many cases, employers simply don’t realize there may be better solutions available.
The 401(k) industry has evolved significantly over the past decade. Technology has improved. Fee transparency has improved. Participant tools have improved. But not every plan has kept pace.
Sometimes relatively small operational improvements can dramatically improve the experience for both the employer and the employees.
Bottom Line:
If you are running a business, you’re busy; I can say that with certainty. Running a 401(k) on top of running your business can make things more overwhelming than they need to be and can end up being a source of stress and distraction.
This is where a good advisor comes in. Helping to make sure the plan document is set up properly, that the plan is staying in compliance, that its investment line up is monitored, that participants are actually using it, and that there are no high/hidden fees or inefficiencies that are weighing down the plan.
A 401(k) plan doesn’t need to be perfect to be successful. But it does need ongoing attention.
If yours isn’t getting the attention it needs, it might be time for a plan review. If it feels like something is broken or lagging with your 401(k), let’s take a look under the hood and see how we can help.
Wishing your business and 401(k) plan ongoing success,
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
