Retirement plan operational failures: why an ‘I’ll-fix-it-later’ mindset doesn’t work

Operational failures can occur in retirement plans regardless of how well they are managed. When errors are identified, plan sponsors should work to correct them promptly as part of their fiduciary responsibilities. Delaying action often leads to more extensive issues because correction options become more limited, administrative challenges increase, and errors can continue to compound over time.

Why timely correction matters

It may be tempting for plan sponsors to approach plan errors with an ‘I’ll-fix-it-later’ mindset while other priorities persist. However, timely correction is crucial for several reasons:

• Noncompliance can lead to significant penalties, taxes, or qualification issues.
• IRS correction methods may require correction within a certain time frame, and permissible methods become more limited as time passes.
• Timely correction of errors demonstrates proper fiduciary oversight.
• Corrections become administratively more difficult as time passes and impacted participants exit the plan.

What are operational failures?

An operational failure generally refers to a failure to follow plan provisions, but it can also refer to a failure to comply with certain rules or regulations.

Common operational failures

Although operational failures can occur in many forms, several are frequently observed in the industry:

• Failure to remit participant deferrals and loan repayments in a timely manner
• Failure to apply the correct definition of eligible compensation 
• Failure to follow the plan’s eligibility requirements, including failure to enroll eligible participants in the plan in a timely manner
• Failure to calculate participant deferrals in accordance with participant elections
• Failure to apply forfeitures or other suspense account balances in a timely manner

How to fix errors

The IRS provides a 401(k) plan fix-it guide that includes examples of common plan errors, steps to correct them, and available correction programs depending on the circumstances.

The correction process generally involves:

1. Identifying the error and determining the extent of the impact
2. Correcting the error using one of the IRS’s correction methods:
   • Voluntary Correction Program (VCP)
   • Self-Correction Program (SCP)
3. Implementing procedures to help prevent future errors

The bottom line

The IRS provides guidance and correction programs to address many common operational failures. While operational errors can happen, prompt correction is essential. Waiting to address errors typically increases the correction process’s complexity and can create additional compliance, administrative, and fiduciary challenges.

Sikich helps plan sponsors navigate employee benefit plan audits with an efficient, practical approach designed to minimize surprises and keep the process moving. Our experienced professionals can help you address compliance requirements, strengthen audit readiness, and identify opportunities to improve the audit process.