Top 3 Mistakes Plan Administrators Make with 401(k) Plans: Avoid These Costly Errors

401(k) plans are a vital benefit for employees, offering a structured way to save for retirement, while also serving as a key perk for employers aiming to attract and retain top talent. However, managing these plans is far from simple. Plan Administrators often stumble into pitfalls that can diminish returns, frustrate participants, and even expose organizations to legal risks. In this quick, three-minute read, we’ll dive into the top three mistakes Plan Administrators make with 401(k) plans, explore their impact with real-world examples, and provide actionable fixes. Plus, we’ll throw in an “honorable mention” fourth mistake and wrap up with a free resource to help you optimize your plan.

Mistake 1: Overlooking Hidden Fees

Why It’s a Problem

Hidden fees are the silent killers of 401(k) plans. These sneaky costs—think expense ratios, administrative charges, or transaction fees, or loss of returns via mandated fund selections —might seem minor, but they compound over time, eating away at participants’ retirement savings. Consider this: a 1% fee difference on a $100,000 balance could cost an employee $60,000 or more by retirement, assuming a 30-year timeline and modest growth. Too often, Plan Administrators don’t even realize these fees exist because they’re buried in fine print or obscured by complex provider agreements.

Real-World Impact

Imagine an employee diligently contributing to their 401(k) for decades, only to discover that high fees have slashed their nest egg by a third. This isn’t hypothetical—it’s a reality for many participants in plans where fees aren’t scrutinized.

The Fix

Take control by benchmarking your plan’s fees every 12-18 months. Compare them to industry averages and push your provider for transparency. But don’t stop there—here’s how to actively lower those fees:

• Swap for Highly Correlated, Lower-Cost Investment Options: Review your plan’s investment lineup for funds with high expense ratios. Look for lower-cost alternatives—like index funds or ETFs—that are highly correlated in terms of performance but charge less. For example, replacing an actively managed large-cap fund with a 0.8% expense ratio with a comparable S&P 500 index fund at 0.03% can save participants thousands over time without sacrificing returns.
• Review Advisor and Recordkeeper Fees: Don’t just accept the fees your advisor or recordkeeper charges—negotiate them. Advisors often charge a percentage of assets under management (e.g., 0.5%-1%), but you might secure a flat fee structure that’s more cost-effective for larger plans. Similarly, recordkeepers may bundle services you don’t need. Ask for an itemized breakdown and push for a leaner package that fits your plan’s size and needs.
• Leverage Free Tools from the Department of Labor: The DOL offers free resources like the 401(k) Fee Disclosure Tool, which helps you compare fees across providers and understand what’s reasonable. Use it to arm yourself with data before negotiating with vendors or selecting new ones.
• Consider Collective Investment Trusts (CITs): If your plan qualifies, CITs can be a cheaper alternative to mutual funds. They often have lower operating costs and no 12b-1 fees, making them a smart choice for cost-conscious plans.
• Engage Participants in Fee Awareness: Educate employees about the impact of fees on their savings. When participants demand transparency, it creates pressure for providers to keep costs competitive. A simple annual email or infographic showing how fees affect long-term growth can spark this awareness.

If the numbers don’t add up after your review, don’t hesitate to negotiate better terms or shop around for a more cost-effective provider. Your employees’ financial future hinges on this vigilance.

Mistake 2: Neglecting Employee Education

Why It’s a Problem

A 401(k) plan is only as good as the people who use it—but if employees don’t understand it, they won’t participate or invest wisely. Many don’t grasp the tax advantages, the power of employer matches, or how to diversify their portfolios. This leads to low enrollment and missed opportunities. Without guidance, employees might stash everything in low-yield cash options or avoid contributing altogether, stunting their retirement growth. A 2023 PwC Employee Financial Wellness Survey found that 44% of employees feel distracted by finances at work, often due to a lack of understanding, which can spill over into reduced productivity and higher stress.

Real-World Impact

The financial stakes are high. A study by The Principal Financial Group showed that employees who received one-on-one financial counseling at work increased their 401(k) deferral rates by 9% compared to those who didn’t. For a typical worker, this higher savings rate could translate into an additional $242,000 by retirement—equating to an extra $905 per month in retirement income. Another study from the Global Financial Literacy Excellence Center (GFLEC) in 2020 revealed that employees with poor financial literacy spend up to six hours per week during work hours worrying about personal finances, leading to a productivity loss that can cost employers 11-14% of their payroll, according to a 2019 Salary Finance survey. On the flip side, a mid-sized company saw a 40% participation rate in their 401(k) plan jump to 60% within a year after launching short workshops and distributing a one-page benefits guide—unlocking millions in collective savings potential for their employees.

The Fix

Prioritize education with simple, regular touchpoints. Host regular 20-minute webinars, share a clear “401(k) Basics” handout, or offer optional one-on-one sessions with a financial advisor. Make it easy, and watch engagement soar. To supercharge participation, consider offering incentives for employees who take proactive steps. For example, provide an extra PTO day or two for those who build a comprehensive financial plan with your advisor on record. This not only encourages employees to engage with their 401(k) but also fosters a culture of financial wellness. A 2018 study in Education Finance and Policy found that well-designed incentives can significantly increase investment in educational activities, with participants showing greater effort when rewards are tied to action. An extra day off is a small price for the business compared to the long-term gains: employees who are financially literate are 5.8 times less likely to miss deadlines and 4.9 times less likely to produce lower-quality work, per the Salary Finance survey. By investing in education and incentivizing action, you’re not just boosting retirement savings—you’re building a more focused, productive workforce.

Mistake 3: Ignoring Fiduciary Oversight

Why It’s a Problem

Plan Administrators aren’t just managers—they’re fiduciaries with a legal duty to act in participants’ best interests under the Employee Retirement Income Security Act (ERISA). Specifically, ERISA Section 409 holds fiduciaries accountable for ensuring the plan operates solely for the benefit of participants and beneficiaries. This includes duties like prudently selecting and monitoring investments, ensuring fees are reasonable, following the plan’s terms, and diversifying investments to minimize risk of large losses. Fiduciaries must also avoid conflicts of interest and document every decision thoroughly. Ignoring these responsibilities can lead to poor plan performance and serious legal trouble. The Department of Labor (DOL) doesn’t mess around—non-compliance can trigger audits, fines, or lawsuits.

Real-World Impact

The consequences of neglecting fiduciary duties are severe, and they hit fiduciaries on both a plan and personal level. For example, Walmart faced a multimillion-dollar lawsuit after fiduciaries failed to monitor high-cost funds, leaving participants with subpar returns. The fallout? Legal fees, settlements, and a damaged reputation—all avoidable with proper oversight. Under ERISA Section 409, fiduciaries who breach their duties are personally liable to restore any losses to the plan. This means if a fiduciary’s negligence—say, failing to replace an underperforming fund—causes a $500,000 loss to participants, they could be on the hook to repay that amount out of their own pocket. Beyond financial penalties, fiduciaries can face civil lawsuits from participants, DOL enforcement actions, and even removal from their role. In extreme cases, breaches involving fraud or self-dealing can lead to criminal charges, as seen in a 2022 DOL case where a fiduciary was sentenced to 18 months in prison for misappropriating plan assets. On a personal level, the stress of litigation, reputational damage, and potential bankruptcy can be devastating. A 2021 study by the Center for Retirement Research at Boston College found that fiduciary lawsuits have risen 30% over the past decade, with average settlements exceeding $10 million—numbers that should keep any Plan Administrator up at night.

The Fix

Set up a quarterly 10-minute fiduciary review. Check investment performance, confirm fees align with benchmarks, and log every decision. For example, document why you chose a particular fund or why you retained a recordkeeper despite a fee increase—this paper trail can be your best defense in an audit. It’s a small time commitment that shields your organization—and you personally—from big risks, ensuring the plan serves its purpose while keeping you compliant with ERISA’s stringent standards.

Honorable Mention: Failing to Benchmark the Plan

Why It’s a Problem

Even if you dodge the top three mistakes, there’s a sneaky fourth: not benchmarking your plan. Without comparing your 401(k) to industry standards, you might miss gaps in fees, investment options, or participant outcomes. An unbenchmarked plan can stagnate, leaving your employees with a less competitive retirement benefit and your company at a disadvantage in the talent market.

Real-World Impact

Consider Uber’s experience. In 2020, the tech giant faced a class-action lawsuit alleging that its 401(k) plan fiduciaries failed to monitor excessive fees and offered high-cost investment options, costing participants significant retirement savings. A benchmark revealed that Uber’s fees were well above industry averages—some funds carried expense ratios nearly double what comparable low-cost alternatives offered—and the plan’s investment lineup lacked sufficient diversification, exposing participants to unnecessary risk. After the lawsuit, Uber settled for $9.5 million and took action: they reduced fees, introduced lower-cost index funds, and improved diversification. As a result, participant costs dropped, and enrollment in the plan increased by an estimated 15% over the next two years, saving employees thousands in fees and boosting their long-term retirement outcomes.

The Fix

Conduct a thorough benchmarking analysis every couple of years. Use the data to tweak fees, enhance offerings, and stay ahead of trends. It’s the difference between a good plan and a great one.

Optimize Your Plan with Our Free Benchmarking Report

Avoiding these mistakes is a solid start, but why stop there? At Link Financial Advisory, we’re offering a free Employee Sponsored Plan Benchmarking Report to help you take your 401(k) to the next level. This isn’t just a checklist—it’s a comprehensive tool that scores your plan on a 0-100 point scale, based on six key areas rooted in ERISA law, DOL regulations, and industry best practices.

What You’ll Get

• Strengths: Where your plan shines.
• Opportunities: Where it can improve.
• Top Priorities: Customized, actionable steps to boost performance.
• Ongoing Support: A dedicated advisor to guide you toward a fully optimized plan.

How It Works

1. Use this link to complete a short questionnaire about your current plan.
2. Our team will use the information to provide you with a detailed report with your score (out of 100) and tailored recommendations.
3. If you decide to pursue the solutions we recommend, we’ll help you implement the changes and monitor your progress over time.

Our goal? To help you build a high-performing 401(k) that meets legal standards, delivers exceptional value to employees, and evolves with your organization’s needs. Whether you’re fixing hidden fees or boosting participation, this report gives you the roadmap.

Ready to see where your plan stands? Contact us today for your free benchmarking report and start building a 401(k) that works harder for everyone.