Managing a 401(k) plan comes with serious legal responsibilities. As a plan fiduciary, you're required to act in the best interests of participants and beneficiaries, making prudent decisions about investments, fees, and plan operations. 

Yet even well-intentioned sponsors make mistakes that expose their organizations to regulatory penalties, litigation, and participant harm. Understanding these common fiduciary mistakes in 401(k) plan oversight, and knowing how to fix them can protect both your employees and your company.

Basic Capital's Approach to Fiduciary Excellence

Basic Capital combines transparent, innovative financing models with rigorous fiduciary support. This approach directly addresses the plan fee pressures, documentation gaps, and participant engagement challenges that create fiduciary exposure for employers.

A fiduciary is anyone with discretionary authority over plan assets or administration, legally required to act in the best interests of plan participants and beneficiaries. This duty encompasses clear documentation, ongoing investment review, and independent oversight—responsibilities that many sponsors misunderstand or inadvertently neglect. Basic Capital's automation and guidance help clients avoid these pitfalls by streamlining compliance processes and providing transparent, participant-centric solutions that reduce administrative burden while strengthening fiduciary posture.

1. Excessive or Hidden Fees

Excessive or hidden fees are a common fiduciary mistake that can jeopardize a 401(k) plan. Undisclosed administrative charges, revenue-sharing arrangements, or inflated investment expense ratios harm participant outcomes and frequently serve as the basis for litigation against plan sponsors and employers.

The solution lies in proactive fee management. Benchmark your plan fees annually against industry standards for similarly sized plans. Review all service provider fee disclosures required under ERISA 408(b)(2) regulations, which mandate transparency about compensation and potential conflicts of interest. Understanding what employers need to know about 408(b)(2) disclosures helps ensure you're capturing the full fee picture. Seek lower-cost institutional share classes or collective investment trusts (CITs) where appropriate to reduce participant costs without sacrificing investment quality..

Consider how a 0.50% fee difference compounds over a participant's career. On a $100,000 balance growing at 6% annually, that half-percent costs nearly $28,000 over twenty years—a difference that could mean earlier retirement or enhanced financial security.

2. Inadequate Documentation and Recordkeeping

Inadequate documentation of fiduciary decisions and meetings is a major red flag [4]. Missing or incomplete records of committee meetings, investment reviews, or decision rationales undermine a plan's ability to defend its actions during audits or litigation. Without documentation, even prudent decisions appear arbitrary or careless.

Establish a consistent documentation practice that includes thorough meeting notes, formal agendas, and clear decision rationales for all fiduciary actions. Develop and maintain an Investment Policy Statement (IPS) that outlines your plan's investment philosophy, selection criteria, and review procedures. Organize these materials in a centralized system for easy retrieval during audits or due diligence reviews.

Your documentation should answer three questions for every significant decision: What did we consider? Why did we make this choice? What evidence supported our conclusion? This disciplined approach demonstrates the prudent process that ERISA requires and provides your strongest defense if fiduciary actions are challenged.

3. Operating Contrary to the Plan Document

Operating inconsistent with plan documents is a serious fiduciary mistake that increases the risk of audits and litigation, even when deviations seem minor or unintentional. The plan document serves as the legal blueprint for how your 401(k) must be administered, specifying everything from eligibility requirements to matching formulas and distribution rules.

Common examples include misapplying eligibility criteria, calculating employer matches incorrectly, or depositing contributions on schedules that differ from plan terms. These operational failures can disqualify the plan's tax-favored status and trigger correction programs with the IRS or Department of Labor.

Establish a quarterly review process where you compare actual plan operations against the written plan document. Document all discrepancies immediately and implement corrections through the appropriate IRS or DOL voluntary correction program. Consider engaging a third-party administrator to conduct an annual operational audit that identifies and resolves conflicts before regulators discover them.

4. Late or Improper Contribution Deposits

Improper handling or late remittance of participant contributions is a recurring fiduciary failure that triggers excise taxes, penalties, and potential prohibited transaction violations under ERISA. The Department of Labor considers participant deferrals to be plan assets as soon as they can reasonably be segregated from employer funds—typically within just a few business days of each payroll.

Create strict payroll procedures that prioritize timely contribution processing. Automate deposit processes where possible to eliminate manual delays. Run regular spot-checks comparing payroll processing dates to contribution deposit dates, ensuring deferrals are transmitted at the earliest possible date. Understanding a practical guide to 401(k) fee disclosures for employers also helps identify whether late deposit issues may be affecting participant accounts.

Common triggers for late deposits include payroll system upgrades, staffing changes in the payroll department, or manual deferral handling during provider transitions. Anticipate these risk periods and implement additional controls to maintain compliance.

5. Weak Service-Provider Oversight and Conflicts of Interest

Conflicts of interest between providers and plan sponsors are a common 401(k) risk [2]. Many sponsors mistakenly believe their recordkeeper acts as a fiduciary, when in reality most recordkeepers explicitly disclaim fiduciary status in their service agreements. Relying solely on a non-fiduciary provider creates significant exposure to self-dealing, excessive fees, or inappropriate product recommendations.

Conduct regular requests for information (RFIs) or requests for proposals (RFPs) for all service providers—not just when problems arise, but as part of routine oversight every three to five years. Review 408(b)(2) disclosures carefully to understand compensation structures and potential conflicts. Consider hiring an independent fiduciary advisor who accepts co-fiduciary status and provides unbiased oversight of investments and service providers..

The contrast is stark: oversight with an independent advisor provides documented, objective reviews of provider performance and fee reasonableness, while oversight without independent advice often relies on the very parties whose fees you're evaluating—an inherent conflict that regulators and plaintiffs scrutinize closely.

6. Poor Investment Monitoring and Menu Stagnation

A stagnant investment lineup with no performance reviews signals weak oversight. Failing to update investment options or criteria can directly harm participant returns when funds underperform, increase expenses, or diverge from plan objectives. Fiduciary duty requires ongoing monitoring, not one-time selection.

Establish formal, scheduled investment reviews—quarterly or at minimum semiannually—guided by an updated IPS that specifies performance benchmarks, expense thresholds, and criteria for replacement. Document each review with clear findings about fund performance, expense ratios, manager changes, and alignment with plan investment tiers. Replace underperforming funds or those with better-performing, lower-cost alternatives when your criteria warrant change.

A simple checklist strengthens this process: Review performance versus benchmarks, compare expense ratios to category averages, evaluate any manager or strategy changes, assess participant utilization, and document the committee's conclusions and actions for each investment option.

7. Payroll and Compensation Errors

Payroll errors—missed deferrals or wrong matches—are the #1 source of 401(k) problems.. Mistakes in payroll codes, bonus treatment, or match calculations jeopardize compliance testing, create participant complaints, and require costly corrections through IRS voluntary programs.

Test payroll integration thoroughly during provider changes or system upgrades. Run parallel test files after updates to catch mapping errors before they affect live participant accounts. Perform quarterly audits comparing payroll system records against plan recordkeeper data to identify discrepancies early. Automate match calculations where possible and establish clear policies for how bonuses, commissions, and overtime factor into plan compensation.

Document your payroll review process and maintain logs of errors discovered and corrected. This record demonstrates your oversight efforts and helps identify systemic issues that require process changes rather than repeated one-off fixes.

8. Missed Regulatory Notices and Required Minimum Distributions

Missing legally required communications or distributions exposes the plan to regulatory penalties and participant complaints. Required minimum distributions (RMDs) are IRS-mandated payouts that sponsors must ensure are distributed by stated deadlines.. Missed regulatory notices—enrollment communications, compliance disclosures, fee notices—create compliance gaps that auditors readily identify.

Establish an annual compliance calendar that tracks all required notices and RMD deadlines. Use automated delivery systems with confirmation logs for enrollment materials, safe harbor notices, fee disclosures, and annual funding notices. For RMDs, work closely with your recordkeeper to identify affected participants well before year-end deadlines and document your process for calculating, notifying, and processing these distributions.

Technology makes this easier than ever, but ultimate responsibility remains with the plan sponsor. Review confirmation reports regularly and investigate any failed deliveries immediately.

9. Insufficient Participant Education and Communications

Failing to provide adequate participant education undermines plan effectiveness and compliance. Unclear or lacking communication leads to poor participation rates, inappropriate investment choices, and participant claims that they weren't properly informed about plan features or changes.

Offer plain-English guidance through periodic communications that explain plan benefits, investment options, and available resources. Don't treat auto-enrollment as set-and-forget—participants still need education about savings rates, investment selection, and the importance of monitoring accounts. Consider interactive education programs, one-on-one sessions for major life events, and targeted outreach to participants approaching retirement.

Effective education measurably improves engagement. Plans with quarterly education initiatives typically see participation rates 15-20% higher than those providing only enrollment materials, along with more appropriate asset allocations across different age groups.

10. Cybersecurity and Recordkeeping Failures

Failing to safeguard participant data is both a fiduciary and operational risk in today's digital landscape. Cybersecurity failure—such as sending sensitive forms via unsecured email or storing account information on unencrypted systems—can lead to identity theft, financial losses, and legal consequences. Additionally, keeping complete, organized records is not only best practice—it's often required for regulatory audits and defense.

Implement encrypted digital storage for all plan documents and participant data. Centralize records in a secure system with access controls and audit trails. Conduct regular security audits to identify vulnerabilities in how participant information is collected, stored, and transmitted. Train staff on data protection protocols and establish incident response procedures for potential breaches.

Modern threats demand modern protections. Your fiduciary duty to protect participant interests extends to their personal information and account security, not just their investment returns.

Frequently Asked Questions

What are the most common fiduciary mistakes in 401(k) plan oversight?

The most common fiduciary mistakes include excessive or hidden fees, poor investment monitoring, late or improper deposits, inadequate documentation, and failing to follow the plan document. These errors frequently trigger Department of Labor audits and participant lawsuits because they directly harm retirement outcomes or demonstrate imprudent oversight. Addressing these issues proactively through benchmarking, formal review processes, and proper documentation protects both participants and plan sponsors.

How can plan sponsors reduce the risk of costly fiduciary errors?

Plan sponsors can minimize risk by routinely benchmarking fees against industry standards, formalizing documentation of all fiduciary decisions, reviewing providers and investments on scheduled intervals, and engaging independent fiduciary advisors for unbiased oversight. Establishing a compliance calendar, automating routine processes, and conducting regular operational audits also help identify and correct issues before they escalate into regulatory problems or litigation.

What role does fee benchmarking play in fiduciary responsibility?

Fee benchmarking ensures the plan pays reasonable costs by comparing administrative fees, investment expenses, and service provider compensation with industry standards for similar plans. This comparison provides objective evidence that the fees paid are appropriate, helping prevent overcharges that harm participant account growth and reducing litigation risk. Regular benchmarking—ideally annually—demonstrates the ongoing prudent process that ERISA fiduciary duty requires.

Why is documentation critical for defending fiduciary decisions?

Proper documentation—including meeting notes, decision logs, investment reviews, and policy statements—demonstrates a prudent process and provides the best defense if fiduciary actions are challenged in litigation or regulatory audits. Without documentation, even wise decisions appear arbitrary or careless. Courts and regulators evaluate the process used to make decisions, not just the outcomes, making thorough contemporaneous records essential to proving fiduciary compliance.

How often should investment options and service providers be reviewed?

Investment options should be reviewed at least quarterly or semiannually, with a documented process that evaluates performance against benchmarks and fees against category averages. Service providers should undergo comprehensive reviews every three to five years through formal RFI or RFP processes. More frequent reviews may be warranted when significant market changes occur, funds experience manager turnover, or fee structures change. All reviews should be documented and guided by the plan's Investment Policy Statement.