Most 401(k) compliance mistakes don’t come from bad actors. They come from good people who don’t realize their system or thought process is missing a vital piece.
That’s the perspective from a recent post by Cassell Plan Audits, a firm specializing in retirement plan audits, which counts down the top three mistakes they see during audit season. The throughline: plan sponsors often believe they’re protected when they’re still on the hook for compliance failures.
The most dangerous mistake? Believing you’ve offloaded fiduciary responsibility. Plan sponsors often assume that hiring a 3(16) fiduciary, a great TPA, and an auditor means they’re covered—or that joining a PEP or PEO transfers responsibility entirely. It doesn’t. You can delegate tasks, but you can’t delegate responsibility. Even if someone else is signing your Form 5500 or managing day-to-day operations, the DOL and IRS still see the plan sponsor as the responsible party. The job isn’t to do everything yourself—it’s to understand enough to ask questions, notice patterns, and act when something’s off.
The second most common issue involves compensation definitions and true-ups. According to Cassell, about 75% of the audits they perform include a compensation definition error. Teams leave manual checks, bonuses, or special payments out of plan compensation even though the plan document says they should be included—or include pay types the document says should be excluded. True-up calculations compound the problem when they’re based on the wrong pay periods or include compensation earned before eligibility. Compensation isn’t a casual HR term; it has a technical definition that must align across the plan document, payroll codes, and recordkeeper setup. When it doesn’t, everything downstream—deferrals, match, testing, corrections—goes wrong.
The third mistake is treating technology like it’s infallible. Between payroll systems, recordkeepers, and AI tools, it’s tempting to believe that if the system allows something, it must be okay. Cassell points to SECURE 2.0 changes around Roth catch-up contributions for highly compensated employees as a case in point. Some payroll providers let employees defer both regular pre-tax and catch-up contributions from day one—but by law, a dollar only becomes “catch-up” after a participant hits the regular deferral limit. Systems that treat the first $7,500 as catch-up just because someone coded it that way are simply wrong. The result: misreported contributions, potential double-taxation issues, and expensive corrections. Automation is helpful, but it’s not a substitute for human oversight and alignment with the plan document.
These three themes—over trusting technology, mishandling compensation, and assuming someone else has it covered—are where many plans quietly drift into trouble. The audit is often where it all surfaces. By then, the errors may have been compounding for years.
