Summary

Here are six of the most common retirement planning mistakes plan sponsors are making right now, and what you can do about each one.

Under ERISA, plan sponsors are held to a fiduciary standard. But even well-run organizations miss critical gaps in day-to-day plan administration. Those gaps don't just create operational headaches; they can expose the plan to audit risk and lead to worse outcomes for participants.

For advisors, these are teachable moments. Identifying and correcting them is one of the clearest ways to demonstrate fiduciary value to plan sponsor clients.

Here are six of the most common retirement planning mistakes plan sponsors are making right now, and what you can do about each one.

6 Common Plan Sponsor Mistakes

1. Failing to Manage Small-Balance Accounts

Terminated participants with balances under $7,000 often remain in the plan indefinitely when mandatory cash-out and automatic rollover processes aren't consistently applied.

That creates ongoing recordkeeping costs, complicates plan audits, and increases the plan's administrative footprint.

Under SECURE 2.0 (effective December 31, 2023), sponsors can now force out balances up to $7,000 into a safe harbor automatic rollover IRA, up from the prior $5,000 threshold. However, many sponsors haven't updated their plan documents or processes to reflect this change.

How to address it:

Establish and document a small-balance distribution and automatic rollover IRA policy
Update plan documents to reflect the SECURE 2.0 threshold of (less than $7,000)
Partner with a qualified automatic rollover IRA provider
Conduct periodic reviews of terminated participant accounts

2. Defaulting Participants into a Poor Automatic Rollover IRA

Selecting an automatic rollover IRA provider without proper due diligence means terminated participants may end up in accounts with high fees and limited investment options, also known as a junk IRA. That's a fiduciary problem, not just an administrative one.

Provider selection criteria matter. Fees, interest rates or yields, capital preservation features, and the quality of participant communication all affect participant outcomes. ERISA's safe harbor allows employers to initiate the rollover itself, but it doesn't eliminate the fiduciary obligation to evaluate the provider carefully and document that process.

How to address:

Conduct due diligence on automatic rollover IRA providers, including fees, yields, and capital preservation features
Document fiduciary rationale for provider selection and ongoing oversight
Replace providers that no longer meet fiduciary standards

3. Treating 401(k) plan termination as a routine administrative task

Plan termination may be treated as a routine administrative task rather than a fiduciary process, which can contribute to delays and inconsistent execution.

How to address:

Establish a formal plan termination timeline
Coordinate timely and compliant participant communications
Coordinate rollover options to IRAs or successor plans for terminated employees
Coordinate execution across recordkeepers and service providers
Monitor progress through final distributions and plan completion

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4. Not reviewing the automatic rollover IRA provider after the initial selection

Initial due diligence isn't enough. ERISA's fiduciary duty is ongoing. Fees change. Yields shift. Provider quality evolves. A provider that met your benchmarks three years ago may not today.

How to address:

Set a formal review schedule, at a minimum annually
Benchmark fees, investment performance, and service quality
Document review outcomes and fiduciary decision-making rationale
Replace providers that no longer meet fiduciary standards

5. Weak Participant Offboarding Experience for terminated participants

How a plan communicates with participants at termination can support participants’ long-term retirement goals. Poor communication leads to cash-outs. Cash-outs mean taxes, early withdrawal penalties, and lost compounding. That's retirement leakage no one can afford.

How to address:

Develop standardized offboarding communications and processes
Educate participants on rollover implications, IRAs, and potential tax and penalty implications of withdrawals
Provide clear and simple pathways to qualified IRAs or successor employer plans
Track cash-out and rollover outcomes to assess the effectiveness of the offboarding process

6. Treating Compliance as the Finish Line

Meeting regulatory requirements doesn't mean the plan is serving participants well. A plan can be fully compliant and still carry poor fee structures, low engagement, and high cash-out rates.

How to address:

Evaluate plan success based on participant outcomes
Review the effectiveness of cash-out and rollover processes
Monitor fees and participant engagement across segments
Continuously improve plan design and governance practices
Align plan objectives with retirement readiness outcomes

Each of these issues creates a practical opportunity for advisors to add value. By improving force-out and automatic rollover IRA processes, advisors can reduce the number of participants who end up in low-quality IRAs or take premature distributions. At the plan level, stronger governance means lower administrative burden and a cleaner plan for audits and terminations.

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Why Small-Balance Accounts Are a Plan Health Problem

Dormant accounts are more than leftover balances. They can create ongoing challenges for compliance, reporting, and fiduciary oversight throughout the life of a plan.

An automatic rollover IRA solution addresses this at scale by moving small-balance 401(k) accounts out of the plan through a compliant process. This helps reduce administrative burden, improve governance, and strengthen the plan’s position in the event of regulatory review.

PensionBee’s automatic rollover IRA solution supports this process end-to-end, from initiating the mandatory distribution to managing participant communications It’s designed for advisors who need a turnkey solution for ongoing plan administration and for sponsors working through the plan terminations.

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Frequently Asked Questions (FAQs)

1. Why are small-balance accounts a fiduciary concern?

Small-balance accounts can increase administrative complexity, drive up recordkeeping costs, and create ongoing fiduciary oversight obligations. Without a clear mandatory cash-out strategy, these accounts can accumulate and expose the plan to unnecessary risk.

2. What is a force-out provision in a 401(k) plan?

A force-out provision allows plan sponsors to automatically distribute small account balances (typically under $7,000) when a participant terminates employment, if the plan elects to include this feature. These balances are often rolled into a safe harbor IRA if the participant does not take action.

3. How should plan sponsors evaluate automatic rollover IRA providers?

Sponsors should compare fees (including annual maintenance and any transfer-out charges), yields or interest rates, capital preservation features, and the quality of participant communications. The selection process should be documented, and the provider should be reviewed on a recurring basis. Failing to do this can result in participants being defaulted into accounts that don't serve their long-term interests, which creates its own fiduciary risk.

4. Why does participant offboarding matter in retirement plans?

The offboarding process is a critical moment where participants make decisions about their retirement savings. Poor communication or lack of guidance can lead to cash-outs, resulting in retirement leakage and reduced long-term outcomes.

5. What are the risks of taking a hands-off approach to plan decisions?

Decisions such as rollover provider selection, force-out thresholds, and plan design features require ongoing monitoring. Failing to revisit these decisions can lead to outdated practices, higher fees, and increased fiduciary exposure.

6. How can advisors add value to plan sponsors in this area?

Advisors can help by benchmarking service providers, improving rollover processes, and implementing a plan oversight process, which can strengthen fiduciary oversight and support participants’ long-term retirement goals.

7. What happens during a 401(k) plan termination?

Plan termination involves fully distributing all plan assets, communicating with participants, and coordinating with service providers. It is a fiduciary process that requires careful planning, documentation, and execution to avoid delays and compliance issues.

8. Is compliance enough to ensure a well-run retirement plan?

No. While compliance is essential, it does not ensure effective plan governance or administrative efficiency. Effective plan management requires ongoing evaluation of fees, service providers, and operational processes.

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Disclaimer

Your investment can go down as well as up. This post, and any associated customer testimonial or third party endorsement, is provided solely for informational and educational purposes, should not be taken as tax, legal, financial or investment advice and is not an offer, solicitation, or recommendation to buy or sell any securities or investments. https://www.pensionbee.com/us/social-disclosures

Market Analysis

Retirement planning mistakes your plan sponsor Is probably making

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Summary

Here are six of the most common retirement planning mistakes plan sponsors are making right now, and what you can do about each one.

6 Common Plan Sponsor Mistakes

1. Failing to Manage Small-Balance Accounts

2. Defaulting Participants into a Poor Automatic Rollover IRA

3. Treating 401(k) plan termination as a routine administrative task

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4. Not reviewing the automatic rollover IRA provider after the initial selection

5. Weak Participant Offboarding Experience for terminated participants

6. Treating Compliance as the Finish Line

Why Small-Balance Accounts Are a Plan Health Problem

Frequently Asked Questions (FAQs)

1. Why are small-balance accounts a fiduciary concern?

2. What is a force-out provision in a 401(k) plan?

3. How should plan sponsors evaluate automatic rollover IRA providers?

4. Why does participant offboarding matter in retirement plans?

5. What are the risks of taking a hands-off approach to plan decisions?

6. How can advisors add value to plan sponsors in this area?

7. What happens during a 401(k) plan termination?

8. Is compliance enough to ensure a well-run retirement plan?

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