The Five Biggest Mistakes Plan Sponsors Make

The Five Biggest Mistakes Plan Sponsors Make

May 06, 2016

Plan sponsors know that there are more liabilities and regulations for them to worry about than ever before. They are concerned with IRS rules, fiduciary responsibilities, and tax law changes. Failure to comply with regulations can be an expensive disaster, with the threat of losing your plan’s qualified status always looming.

In my work with hundreds of retirement plans, I’ve come across a variety of errors and mistakes. Most of the time, we are able to identify and correct plan errors before they cause major issues. However, once in awhile, there are complex problems that we can’t solve. Here are the top five mistakes plan sponsors make:

1. Failure to Follow Their Investment Policy Statement

The goal of a retirement plan is to help participants save for retirement through investments. Plan sponsors have a big responsibility to work with an advisor to select appropriate investments, replace poor performers, and be sure the fees are reasonable. It’s critical to create and follow an Investment Policy Statement to keep your plan’s investments up-to-date and within DOL guidelines.

2. Not Understanding Their Role as Fiduciary

Many of the actions involved in operating a plan make the person performing them a fiduciary. This means that they are required to adhere to ERISA rules for a fiduciary including:

  • Acting solely in the interest of plan participants
  • Carrying out their duties prudently
  • Following the plan documents
  • Diversifying plan investments
  • Paying only reasonable plan expenses

ERISA requires expertise in a variety of areas, such as plan administration and investments. If they lack that expertise, a fiduciary is obligated to hire someone with appropriate professional knowledge to oversee those functions.

3. Not Having a Fidelity Bond

Plan sponsors generally must be covered by a fidelity bond. A fidelity bond is an insurance instrument that protects the plan against losses. The plan's fidelity bond must cover at least 10% of plan assets with a minimum of $1,000 and a maximum of $500,000. Not having a fidelity bond could potentially increase the chances of a DOL audit.

4. Not Reviewing Service Providers

As part of a plan sponsor’s obligation to have only reasonable plan expenses, they are required to review the performance and fees of their service providers. For the arrangement to be deemed reasonable, service providers must provide updates and reports regarding their fees and performance. Be sure to review annual updates from your service providers to be sure their performance and fees are in the best interest of your participants.

5. Not Taking Action to Comply with Changes

April 30, 2016, marked the IRS deadline for employers restate their 401(k), profit-sharing, or other defined contribution retirement plans. Plans that did not comply with the restatement deadline could lose their qualified status or face fines of up to $15,000. It’s the plan sponsor’s responsibility to stay up-to-date on new requirements and comply in a timely manner.

The retirement plan landscape is as complex and challenging as ever. Plan sponsors have a difficult job as their plan’s fiduciary, on top of their other responsibilities. Partnering with an experienced and qualified retirement plan professional make help reduce fiduciary liability and avoid costly mistakes. To learn more about how we help plan sponsors, give me a call today at 480.494.8992 or by email at

About Kenny Phan

Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.