12 Honest Mistakes That Can Cost a Retirement Plan Sponsor Everything

Feb 26, 2026

“I didn’t mean to.”

In most areas of business, a genuine oversight can be corrected with a quick fix and an apology. But under ERISA’s standard of prudence, good intentions are not a legal defense.

If you sponsor a retirement plan, you likely have an ERISA Fidelity Bond. You bought it because it’s a federal requirement for your Form 5500. But that bond is designed to protect the plan from “bad people” doing “bad things” (theft and fraud). It does absolutely nothing to protect you when an honest administrative mistake occurs.

From late deposits to simple filing errors, the personal financial risk of sponsoring a plan is higher than most business owners realize. Here is why “compliance” is only half the battle—and how an honest mistake can end up costing you upwards of $600 an hour in legal fees.

The Personal Liability Trap: What Your Bond Doesn’t Cover

Under ERISA Section 409, plan fiduciaries can be held personally liable to restore any losses to the plan resulting from a breach of duty. The Department of Labor spells out the fiduciary responsibilities of retirement plan sponsors, and makes the consequences of failure clear: “Fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of plan assets. Courts may take whatever action is appropriate against fiduciaries who breach their duties under ERISA….”

So what exactly are the consequences of being personally liable for defense and resolution in the face of ERISA allegations of fiduciary mistakes? Basically, personal liability means that personal savings, business assets, and even homes can be put on the line to cover defense and settlement of an ERISA allegation. Even if you are ultimately found to have done nothing wrong, ERISA defense averages upwards of $600—per hour.

Here are 12 common “honest mistakes” that retirement plan sponsors have to be prepared to defend themselves against:

Late or Missed Deposits: Failing to remit employee salary contributions to the plan immediately (the DOL is increasingly strict on “payday-to-plan” timing).
Form 5500 Failures: Missing the filing deadline or submitting an incomplete annual report.
Plan Document Errors: Failing to follow the specific terms as written in your plan document.
Legislative Delays: Failing to amend your plan on time to comply with emerging federal laws (like the SECURE 2.0 Act).
Loan Failures: Errors in approving, documenting, or tracking participant loans.
Prohibited Transactions: Accidentally engaging in a transaction with a “party in interest” that the DOL forbids.
Improper Disclosures: Failing to provide mandated Summary Plan Descriptions (SPD) or fee disclosures to employees in an adequate and timely manner.
Negligent Errors & Omissions: Basic slip-ups, such as data entry errors during enrollment.
Faulty Investment Advice: Following erroneous guidance or providing improper investment options
Imprudent Service Selection and Monitoring: Hiring a provider without a documented “due diligence” process. Failing to adequately monitor all service providers, including for their cybersecurity protocols.
Faulty Legal Advice: Making a mistake based on incorrect guidance from your own counsel.
Eligibility Oversights: Accidentally excluding a part-time employee who has met the hours-of-service requirements.

The Outsourcing Myth: Why Your TPA Isn’t a Shield

A common misconception among retirement plan sponsors is that hiring a Third-Party Administrator (TPA) or 3(16) fiduciary transfers all the risk away from the business owner. This is a dangerous half-truth.

While you can delegate administrative tasks, you can never completely delegate away your oversight responsibilities as a fiduciary. In fact, according to the IRS and DOL, the act of hiring a service provider is, in itself, a fiduciary act. Specifically, here’s how the Department of Labor explains the “fiduciary function” associated with choosing and using plan providers: “Hiring a service provider in and of itself is a fiduciary function… Even if you hire a financial institution or retirement plan professional to manage your plan, you retain some fiduciary responsibility for the decision to select and keep the service provider.”

The Wagner Law Group delves further into the weight of the “residual risk” retirement plan sponsors carry when hiring a 3(16) administrator, noting: “Unfortunately, even if a 3(16) fiduciary agrees to assume full plan management responsibilities… it cannot fully eliminate the plan sponsor’s fiduciary oversight responsibilities. The courts have held that the sponsor remains responsible for the duly diligent selection and monitoring of such a service provider.”

When it comes to outsourcing, retirement plan sponsors should always remember that under the high standards of ERISA, they retain:

The Duty to Monitor: You are legally required to oversee your providers. If they make a mistake and you didn’t have a process in place to catch it, the DOL holds you responsible.
A Defense Gap: Even if your provider is eventually found at fault in the face of allegations, you are likely to still incur the initial legal costs to defend yourself and your business—fees that an ERISA Bond will not cover.

The Complete Shield: Compliance + Personal Protection

Colonial Surety Company—a national, “A” (Excellent) rated, Treasury-listed provider—offers the only integrated solution that covers retirement plan sponsors for both compliance and personal liability. Our All-in-One Package includes:

ERISA Fidelity Bond: 100% compliance with DOL bond requirements
Fiduciary Liability Insurance: Up to $1,000,000 in coverage for defense and penalties in the event of allegations related to errors like those listed above.
Cyber Liability Insurance: $50,000 of coverage included at no extra cost to address the DOL’s strict standards for response and notification services following cybersecurity incidents. (Colonial Surety Company’s Cyber Liability Insurance explicitly covers both the retirement plan and this business.)

Stop Guessing. Start Protecting.

Don’t wait for a DOL audit, a participant complaint, or a creative plaintiff attorney to find out you’re exposed. Secure your business, your plan, and your personal assets today.

Quote and Obtain Fiduciary+Cyber Liability Insurance Package