Growing Pains: Is Your 401(k) Keeping Up?

Oct 23, 2026

Hiring your 30th employee, opening a second location, buying out a competitor: growth is what business owners live for. But a 401(k) that was just right for 15 employees might be out of step as you expand your team. Be aware that several of the rules that apply to employer sponsored retirement plans are triggered by size, timing or a change in ownership, and none of them sends a reminder when it kicks in.Here are four points where business growth tends to change the job of being a plan sponsor, and what to do before you reach them.

Approaching 100 Participants: The Audit Line

Once a 401(k) has 100 or more participants at the start of the plan year, it generally files its Form 5500 as a “large plan” and must attach an audit by an independent qualified public accountant. That audit is a real budget line item, and a first-year audit takes preparation: payroll records, plan documents and a full year of contribution history.

Two related details tend to catch growing businesses off guard:

Who counts. Since the 2023 plan year, 401(k) plans count participants with an account balance at the beginning of the year, not everyone who is eligible. That helps plans with low participation, but it cuts the other way too. Former employees who left money in the plan still count, and so do employees who stopped contributing. As attorneys at Polsinelli point out, those participants “will still be counted as they will have account balances.”
The 80-120 buffer. If your count falls between 80 and 120 and you filed as a small plan the year before, you can generally file as a small plan again. Once you pass 120, that cushion is gone.

Your move: Ask your TPA for your participant count every year, not just when the Form 5500 is due, so you can see the audit coming and budget for it. And remember you sign off on that form, even though you don’t prepare it: Form 5500: Is Yours Accurate?

More Assets, More Employees, New Requirements

Your bond has to grow with the plan. Under DOL Field Assistance Bulletin 2008-04, the ERISA fidelity bond must cover at least 10% of the plan funds each person handles, up to $500k for most plans (1 million if the plan holds employer securities or nonqualifying assets). The amount is set at the start of each plan year based on the prior year’s figures. Strong asset growth, a wave of new hires or rolling another company’s plan into yours can push the plan past what your bond covers. All About ERISA Bonds reviews the basics.

Automatic enrollment may switch on. Under SECURE 2.0, most 401(k) plans established after December 29, 2022 must automatically enroll eligible employees, beginning with plan years that started after December 31, 2024. Two exceptions matter for growing companies: businesses that have existed for less than three years, and businesses that normally employ 10 or fewer people. Both exceptions end as the company grows, though not overnight. Under the statute, the small-business exception runs until one year after the close of the first tax year in which the business normally employed more than 10 people. The IRS’s proposed rules translate that into the first plan year that begins at least 12 months after that tax year ends. For new businesses, the proposed rules point to the first plan year that begins once the company has existed for at least three years. Final rules are still pending, so if your plan relies on either exception, get your start date confirmed in writing.

Buying or Selling a Business

An acquisition brings the 401(k) along with it, ready or not. In a stock purchase, the buyer steps into the seller’s shoes, including its retirement plan and any mistakes in that plan’s history. In an asset purchase, the buyer generally chooses what it takes, and the seller’s plan often stays behind.

Timing matters most. If the seller’s plan is going to be shut down rather than merged, that decision usually has to be made before the deal closes. Once the companies are under common ownership, IRS “successor plan” rules can block terminating the old plan and paying out balances. Attorneys at Foley & Lardner describe a common, cautious approach: requiring the seller to terminate its 401(k) “at least one business day before the closing date.” If both plans continue after closing, a transition period generally runs through the end of the following plan year, which gives time to merge the plans without combining them for coverage testing.

Your move: Bring your plan provider and benefits counsel into the deal early, ideally during due diligence. Ask for the target plan’s recent Form 5500 filings, testing results and plan document before you sign.

Oversight That Scales

The informal approach that worked with a dozen employees, a quick call with the advisor and a mental note, doesn’t hold up as more people depend on the plan. The Department of Labor puts it plainly: “Prudence focuses on the process for making fiduciary decisions.” A growing plan needs a strong, consistently used and well documented process.

Name who is responsible. Decide who acts as plan administrator or sits on a plan committee. If a plan official named in your plan document changes, the document needs to be updated too.
Meet on a schedule. Review investments, fees and service-provider performance at regular intervals, and keep minutes.
Revisit your providers. The recordkeeper that suited a 20-person company may not be the right fit at 150. Benchmark before you assume.
Write it down. Keep one file of decisions and the reasons behind them.

To go deeper, check out: ERISA Plans: Making Decisions and Monitoring Results and SMBs: Unique Retirement Plan Challenges.

Good To Remember

Growth raises the stakes, not just the paperwork. More participants and more assets mean more people relying on your decisions. Plan fiduciaries can be held personally liable for breaches, and that exposure doesn’t shrink as the plan gets bigger.

Small balances add up. If your plan document allows it, you may be able to cash out former employees’ small balances automatically (up to $7,000 under current rules). Ask your TPA whether your plan uses this feature.

Many of these rules look at the first day of the plan year. Participant counts and bond amounts are both measured as the plan year begins, so growth during the year shows up quickly in the next one.

Colonial Surety Company: Protection That Grows With You

As your plan grows, so does your exposure. When you sponsor an ERISA retirement plan, you can be held personally liable for errors in your oversight of the plan, including:

Decisions: Do you have the right advisor, and investment options?
Cost control: Are the plan fees reasonable and services solid?
Compliance: Do operations adhere to the plan document, and government regulations?
Cybersecurity: Are you actively monitoring the practices of all third parties serving the plan?

Even if you have done nothing wrong, ERISA defense for plan sponsors is an out of pocket expense that adds up quickly, averaging $600 per hour.

Uniquely, Colonial Surety Company offers an affordable and efficient ERISA Bundle that combines three essential protections in one seamless package for retirement plan sponsors:

ERISA Fidelity Bond — Fulfills your federal mandate to protect plan assets from fraud and dishonesty
Fiduciary Liability Insurance — Provides up to $1,000,000 in coverage for legal defense costs and penalties arising from fiduciary errors, administrative oversights, and participant claims
Complimentary $50,000 Cyber Liability Insurance — Protects your plan and company against regulatory actions following a data breach, addressing the DOL’s cybersecurity guidance directly by including expert response services.

Don’t wait for a participant complaint, DOL inquiry, or cyber threat to find out what you’re missing.

Get an instant quote on Colonial Surety Company’s ERISA Bundle today — and protect your plan, your business, and your personal assets in one smart move.

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