Ensuring continuous compliance with ERISA requires not just an initial understanding but also ongoing diligence. A comprehensive understanding of both the broad requirements and the nuanced expectations of ERISA, paired with proactive management strategies, is essential for minimizing legal and financial risk. By identifying the most frequent mistakes, educating staff, and implementing effective strategies, plan sponsors and administrators can protect their organizations from penalties, enhance participant trust, and secure their organization’s reputation.
The Employee Retirement Income Security Act (ERISA), enacted in 1974, was established to safeguard employees’ retirement and health benefits and ensure fairness and accountability in private-sector benefit plans. Despite its importance for both employers and employees, the law’s complexity often leads to preventable compliance mistakes among employers and plan administrators. Even the most well-intentioned organizations can find themselves inadvertently on the wrong side of ERISA’s mandates, leading to significant financial penalties, regulatory investigations, and lawsuits. For those navigating the unique ERISA challenges in major urban areas, consulting a Los Angeles ERISA lawyer can be invaluable in ensuring an organization understands these pitfalls and remains compliant with the law’s intricate requirements.
Failing to Update Plan Documents
One of the primary missteps employers make is neglecting to update plan documents to reflect current laws, IRS regulations, and organizational changes. As laws evolve and business structures shift, ERISA requires these foundational documents to remain accurate and up-to-date at all times. Organizations relying on outdated documents can inadvertently fall out of compliance, which may result in plan disqualification, expensive penalties, or lawsuits filed by employees whose benefits or rights were not properly communicated. Scheduled reviews and systematic updates of plan literature—including summary plan descriptions, plan amendments, and policies—ensure that employees and administrators remain aligned, reducing legal vulnerabilities and operational disruptions.
Mismanagement of Plan Assets
ERISA imposes strict fiduciary duties on individuals who manage plan assets, requiring those with such responsibilities to act with prudence, expertise, and undivided loyalty to plan participants. Mishandling or exercising poor judgment with investment decisions can violate these fiduciary duties, even if the intentions were initially benevolent. For example, a lack of oversight regarding the diversification of investments or failing to follow written investment policies may not only constitute fiduciary breaches. Still, it can also result in personal liability for fiduciaries and substantial financial losses for the plan. To avoid such scenarios, organizations should establish clear internal controls, conduct regular independent audits, and maintain robust investment policy statements designed to strengthen prudent asset management and reduce the risk of inadvertent errors.
Incorrect Reporting and Disclosure
Accurately reporting and disclosing vital plan information to both the Department of Labor (DOL) and plan participants is foundational to ERISA compliance. Common mistakes include making errors while filing mandatory reports such as Form 5500, omitting required schedules or attachments, or distributing participant disclosures after established deadlines. These reporting failures do not go unnoticed and can provoke audits, fines, and additional scrutiny from regulatory bodies. Employers must stay well-informed about the reporting and disclosure schedules required by ERISA, using comprehensive checklists and assigning dedicated compliance roles to monitor and enforce timely submissions. This proactive approach greatly reduces the risk of overlooked or inaccurate filings.
Inadequate Communication with Employees
Miscommunication or insufficient disclosure of plan features, eligibility, and benefits can lead to confusion, employee dissatisfaction, complaints, or legal action. ERISA specifically mandates the clear, regular delivery of comprehensive Summary Plan Descriptions (SPDs) and the timely communication of any significant plan changes. Fostering a culture of transparent, ongoing communication reinforces employees’ confidence in the plan and their understanding of the benefits and protections available to them. Consider holding regular educational sessions, ensuring documentation is clear and accessible, and providing ongoing channels for employees to ask questions so that misunderstandings are minimized before they escalate into larger disputes.
Mishandling Participant Contributions
Another frequent error is the late or improper deposit of employee contributions to retirement plans. Under ERISA, participant contributions must be remitted to the plan as soon as administratively feasible—generally within a few business days of withholding. Even short delays can be classified as prohibited transactions by the DOL, exposing the employer to investigations, required corrections, and potentially significant financial penalties. Implementing clear payroll protocols and automated systems can help ensure prompt, traceable deposits, giving both employers and participants peace of mind while demonstrating the organization’s commitment to rigorous compliance.
Overlooking Employee Eligibility and Participation
Organizations sometimes fail to correctly identify all employees who are eligible to participate in a retirement or welfare benefit plan. Overlooking eligibility or misapplying participation rules can lead to violations that require corrective contributions and payment of government penalties. ERISA establishes specific criteria for eligibility, such as age and hours worked, and plan administrators should regularly review employment records to confirm that all qualified workers have been offered the opportunity to participate. To prevent costly oversights, maintain precise tracking systems, and schedule periodic eligibility audits. These procedures make it easier to identify problems early and remediate them before they escalate into lawsuits or enforcement actions
Poor Fiduciary Oversight
Serving as a fiduciary under ERISA involves more than simply managing the plan. It requires that every decision—hiring service providers, selecting investments, or determining administrative fees—be made prudently and solely in the best interests of plan participants. Common mistakes include failing to adequately monitor third-party service providers, neglecting to document key fiduciary decisions, or not acting on fee disclosure information. Establishing regular fiduciary training sessions, maintaining detailed meeting notes, and forming formal oversight committees can significantly strengthen governance and accountability while reducing exposure to lawsuits or regulatory action.
Ignoring ERISA Bonding Requirements
Every individual who manages or handles retirement plan funds is generally required to be covered by a fidelity bond under ERISA—a safeguard intended to protect plans against loss due to acts of fraud or dishonesty. Many organizations overlook this relatively straightforward requirement, exposing the plan and its participants to risk and subjecting the employer to DOL penalties. Regularly review your plan’s bonding status to ensure full compliance, adjusting as staffing or operational practices evolve and the amount of assets managed changes.
Misinterpretation of Plan Compensation Definition
The plan’s specific definition of compensation plays a direct role in how contributions, benefits, and compliance testing are calculated. Misinterpreting or accidentally deviating from this carefully defined term can create a cascade of operational failures, including improper contribution allocations and inaccurate compliance testing. Such errors can be costly to correct and sometimes result in DOL intervention. Reducing the likelihood of mistakes begins with educating HR and payroll staff, ensuring that payroll systems align precisely with plan documents, and conducting periodic reviews so that all parties operate from the most current and accurate definitions.
Delays in Depositing Employee Deferrals
ERISA strict on timing of employee deposits, with delays risking taxes, penalties, and scrutiny. The solution is automated payroll-plan workflow ensuring timely deposits every pay period. Addressing ERISA errors proactively reduces liabilities, protects assets, and builds employee trust. Ongoing education, communication, effective operations, and expert support are key to compliance, benefiting organizations and employees.
