401(k) Red Flags

For small businesses, choosing the right retirement plan can be tricky. It’s important to balance what is best for the company and what is best for the employees and their financial futures.  

Here are a few things to look out for when you or your clients are looking to start a 401(k) or decide if their current provider is still the best fit.

401k Red Flag #1: You don’t know who is signing your Form 55001 

Form 5500 is a report that businesses must file annually to provide the IRS and U.S. Department of Labor details about the company’s employee benefit plans. It includes details such as the investments, operations, and conditions of the plan. This form is just one of the measures of the Employee Retirement Income Security Act (ERISA) for collecting information about employee benefit plans. 

Form 5500 requires signature by the Plan Administrator, the party who is legally responsible for the plan. 

• The IRS penalty for late filing of a 5500-series return is $25 per day, up to a maximum of $15,000.2
• The DOL penalty for late filing can run up to $2,529 per day, with no maximum.2 

Allowing a provider like Human Interest to handle some of your administrative tasks, such as signing and filing Form 5500, can help ensure annual compliance. 

401K Red Flag #2: You don’t understand your fiduciary liability

There are several levels of fiduciary responsibility related to offering a 401(k) retirement plan. Businesses can hire a service provider or providers to handle some or most of the fiduciary functions, setting up the agreement so that the person or entity then assumes certain fiduciary liability. It is imperative for business owners to understand what they are responsible for and what may or may not be covered by their provider. 

A 3(16) fiduciary is an entity designated as administrator by the employer (or the plan sponsor if one is not designated) to handle certain aspects of the 401(k) plans day-to-day administration, including distribution review and approval, as well as procuring an ERISA bond. 

A 3(38) fiduciary focuses on investment recommendations and is able to make investment decisions on behalf of the client. 

A 3(21) fiduciary provides investment advice but is unable to make investment decisions without the client’s approval. 

401K Red flag #3: You don’t know what fees you’re paying…including your transaction fees

Most 401(k) service providers charge administrative costs for managing a 401(k) plan. This covers the day-to-day operations of a plan, essential administrative services, and other costs.  

Plan fees can be broken out into three categories: 

1. 1. ​​Plan administration fees (typically paid by employers): The costs associated with accounting, recordkeeping (year-end compliance testing, IRS paperwork preparation, and filing), and day-to-day operation of a plan (ongoing operation of plan, conducting trades, customer service, and account management). 

1. 2. Investment fees (typically paid by employees): The expenses associated with managing plan investments, these fees are generally charged as a percentage of fund assets. 

Transaction fees are another common cost associated with offering retirement plans. These are fees that are charged to companies or plan participants based on an action or event. For example, fees an employee may incur when trying to withdraw money for a loan or going through a divorce. This is an additional cost that is often unforeseen by both employers and employees. Human Interest does not charge transaction fees.5

401K Red Flag #4: Your Plan is not protected by an ERISA fidelity bond

ERISA fidelity bonds are a type of insurance that protects the plan against losses incurred by acts of fraud or dishonesty.  Bonds must be obtained from a provider approved by the Department of the Treasury. If a fidelity bond is included with your service agreement, your 401(k) provider may include it in their lump sum fees (by purchasing through a third-party provider on your behalf).  

Plans must obtain a fidelity bond in an amount equal to at least 10% of the amount of the plan assets. For a new plan with assets less than $100,000, premiums are generally only about $100 per year.  

Choosing the retirement plan that best fits a business can be an overwhelming experience. Understanding some of the things that look out for can help your clients make the right choice.

Human Interest offers complimentary plan benchmarking for businesses with existing 401(k) plans to see if their fees and services are appropriate for businesses like theirs. Interested in learning more about benchmarking or starting a new 401(k)? Reach out to cpapartnerships@humaninterest.com.  

1  Form 5500 Corner. IRS.gov.  

2 401(k) Plan Fix-It Guide - You haven't filed a Form 5500 this year. IRS.gov. 

3  Difference between 3(16), 3(38), 3(21) fiduciary. Human Interest. April 2023. 

4 How Much Does a 401(k) Cost Small Business Employers. Human Interest. July 2023. 

5 Goodbye 401(k) Transaction Fees. Human Interest. 2020. 

6 Protect Your Employee Benefit Plan with An ERISA Fidelity Bond. IRS.gov. 

Human Interest Inc. is an affordable, full-service 401(k) and 403(b) provider that seeks to make it easy for small and medium-sized businesses to assist their employees with investing for retirement. For more information, please visit humaninterest.com. 

This content has been prepared for informational purposes only and should not be construed as tax, legal, or individualized investment advice. Human Interest Inc. does not provide tax, legal, or individualized investment advice. Consult an appropriate professional regarding your situation. The views expressed are subject to change. In the event third-party data and/or statistics are used, they have been obtained from sources believed to be reliable; however, we cannot guarantee their accuracy or completeness.