SMBs: Unique Retirement Plan Challenges

With about 62.3 million Americans employed by small businesses, it’s clear that sponsoring a retirement plan is among the most critical actions small business owners can take. That doesn’t mean it’s easy, since most small businesses do not have the layers of finance and HR professionals that larger companies do. Fortunately, many of the challenges and risks associated with sponsoring an ERISA regulated plan, like a 401k, can be mitigated via the careful selection and monitoring of service providers. 

Avoiding Mistakes and Oversights…

Putting employees on a path to successful retirement is a big undertaking—so much so that employer sponsored retirement plans are governed by the Employee Retirement Security Act (ERISA). As the New York City SHRM ( Society for Human Resource Management) points out, properly overseeing and administering an ERISA plan presents small businesses with particular challenges: 

• While large employers benefit from advanced systems, formal governance committees, and strong negotiating power with vendors, small businesses frequently rely on manual processes, informal oversight, and minimal leverage when it comes to fees and services. The result is higher exposure to compliance risks, potential penalties, and less-than-optimal outcomes for employees.

• Unlike large corporations with dedicated benefits teams, small plan sponsors often operate with limited staff capacity, tight budgets, and little specialized knowledge. HR or finance professionals, already juggling multiple roles, must take on fiduciary and administrative responsibilities that demand precision and compliance. This leads to difficulties in areas such as timely contributions, plan oversight, vendor management, and participant education.

• Common pitfalls for small plan sponsors include late deposits of employee contributions, errors in handling eligibility or compensation, failure to distribute disclosures, and missed required minimum distributions (RMDs). Each of these mistakes can result in fines, increased liability, and, most importantly, reduced retirement readiness for participants.

Thankfully, retirement plan sponsors do not have to shoulder all the responsibilities or risks associated with ERISA plans on their own. Through careful selection and monitoring of advisors and third party administrators, retirement plan sponsors from small businesses are succeeding with thriving retirement plans and engaged employees. As the NYC SHRM observes: “By prioritizing prudent processes and people-first strategies, small plan sponsors can ensure they’re not just administering retirement plans, but helping employees prepare for brighter futures.” Specific best practices used by small businesses to ensure effective employee retirement plans include: 

• Partnering with high-touch advisors and third-party administrators (TPAs), 
• Leveraging bundled service providers
• Establishing regular fiduciary reviews, 
• Adopting compliance calendars
• Optimizing plan design—through features like auto-enrollment, auto-escalation, and safe harbor provisions
• Financial wellness programming, clear communication, and personalized education help participants make better decisions and, ultimately, achieve better outcomes. 

Make Decisions, Monitor Results—-and Put Proper Protection In Place

Making decisions and monitoring results are the guts of what every plan sponsor, including those from small businesses, need to take seriously. Plan sponsors must be mindful that while they can hand off administrative work, they can never fully eliminate their inherent  fiduciary obligations to the plan and participants. It’s wise to treat monitoring as ongoing, not annual. A single yearly review isn’t enough when litigation theories and vendor systems are both changing throughout the year. Building a responsibility matrix is a great practice: work with your advisor and legal counsel to map exactly who owns each calculation, notice, and data handoff across your recordkeeper, TPA, and payroll provider. Vague accountability is where problems hide.

Ultimately, no matter how diligent a plan sponsor and their chosen advisor and service providers are, costly mistakes do happen—and that means protection is essential. A common misconception among small and midsize business owners is assuming the ERISA Fidelity Bond their plan is required to carry will also protect them personally if a participant sues over a calculation error or an alleged breach of fiduciary duty. It won’t. 

There are three broad categories of risk sponsors need to be concerned about, and the ERISA Bond only covers one: 

• ERISA Fidelity Bond: protects the plan’s assets from theft or fraud by people who handle plan funds.
• Fiduciary Liability Insurance: protects the fiduciaries, including plan sponsors, themselves — their personal assets and the company’s finances — from the cost of defending and resolving claims of mismanagement or breach of duty.
• Cyber Liability Insurance: helps to cover the plan’s exposure to data breaches and cyberattacks, an area regulators are watching closely right now.

Colonial Surety Company, makes protection efficient and affordable for every retirement plan sponsor, regardless of the size of the business. Uniquely, our Fiduciary + Cyber Liability Bundle combines the ERISA Fidelity Bond, Fiduciary Liability Insurance, and Cyber Liability Insurance so plan sponsors aren’t left guessing which risks are actually covered. 

As an A.M. Best “A (Excellent)” rated, U.S. Treasury-listed surety licensed in all 50 states — and rated 4.8 on Trustpilot — Colonial Surety Company makes it simple to get every layer of protection in place, without piecing it together from multiple sources.

FAQ

Does an ERISA Fidelity Bond cover a lawsuit over a fiduciary breach?

No. A Fidelity Bond only protects plan assets from theft or fraud. Lawsuits alleging administrative errors or breach of fiduciary duty require separate Fiduciary Liability Insurance.

Who is personally liable if a retirement plan is mismanaged?

Individual fiduciaries — often the business owner — can be personally liable under ERISA, even when day-to-day tasks are outsourced to a recordkeeper or third-party administrator.