The IRS is phasing out paper checks for federal payments, including tax refunds and 401(k) distributions. By September 30, 2025, all payments must be made electronically, unless an exception applies.
The shift to fully electronic payment systems in 401(k) plan administration enhances efficiency and reduces fraud from paper checks. However, the digital transformation also increases exposure to cybersecurity threats, requiring immediate attention and strategic planning to protect retirement plans.
In this article, we will list the best practices for ensuring cybersecurity in 401(k) electronic payments.
Who will be impacted by the IRS paper check phase-out?
The transition to fully electronic payments for 401(k) disbursements will impact the following stakeholders in the retirement industry:
Retirement plan administrators
Eliminating paper checks means all client disbursements, including rollovers, loans, withdrawals, and distributions, will be through digital channels. Here is how it will impact plan administrators:
- Plan administration systems and processes must fully support electronic disbursements.
- Increased exposure to cyber risks due to end-to-end digital interactions.
- Need to verify payment readiness and strengthen data security protocols.
Recordkeepers
Recordkeepers will be responsible for tracking participant accounts, contributions, and transaction histories in a wholly digital environment. Here is how it will impact recordkeepers:
- Recordkeepers must update workflows to handle participant data securely.
- Heightened risk of unauthorized access, data breaches, and interception or rerouting of funds.
- Expected to comply with DOL cybersecurity guidance (EBSA Compliance Assistance Release) to protect participant data.
Third-party administrators (TPAs)
TPAs manage the day-to-day operations of 401(k) plans by verifying transactions and issuing paper checks. Here is how the paper check phaseout will impact TPAs:
- Add validation controls to workflows, such as dual authorization and real-time reconciliation, to prevent payment fraud and identity theft.
- Train staff on cybersecurity, with a focus on phishing resistance and secure transactions.
- Deploy fraud detection and anomaly monitoring tools for digital transactions.
- Enforce strict vendor management with cybersecurity attestations, annual audits, and cyber-insurance in service agreements.
The cybersecurity implications of the accelerated shift to electronic payments:
The IRS’s move is driven by efficiency, speed, cost savings, and fraud reduction, but electronic payments present their own set of threats. These include:
- Phishing and business email compromise: Fraudsters may target retirement plan users or administrators.
- Ransomware/extortion: Criminals may attempt to lock access to sensitive participant data or accounts.
- Account takeover and credential stuffing: Attempts to exploit weak passwords or security gaps to access funds.
- Payment redirection schemes: Manipulation of payment instructions to divert benefits.
401(k) plans, which hold trillions in assets and contain sensitive participant data, are prime targets for increasingly sophisticated cyberattacks. The interconnected systems of plan providers create multiple vulnerabilities, while the shift to electronic payments further expands the attack surface, putting participant data and retirement savings at risk.
7 cybersecurity best practices for 401(k) electronic payments
The shift to electronic payments is more than a compliance requirement. It’s an opportunity for retirement plan service providers to enhance cybersecurity, build client trust, and enhance their reputation. The following best practices will help ensure compliance:
1. Encrypt all sensitive data
- Use strong encryption for data at rest and in transit.
- Ensure payment gateways, transaction files, and participant records are protected via end-to-end encryption.
- Use multi-factor authentication (MFA) wherever possible to further secure access.
2. Deploy secure payment gateways
- Implement payment systems with embedded security, such as tokenization and fraud detection, for all disbursements.
- Maintain rigorous security certifications and regular third-party audits.
- Use secure portals for participants to update or verify bank details.
3. Monitor and comply with ERISA and DOL standards
- Conduct annual risk assessments following ERISA guidelines.
- Document information security roles and assign responsibility for regular compliance monitoring.
- Maintain a well-developed incident response plan to respond swiftly to breaches or suspicious activities.
4. Strengthen access control
- Limit system and data access to role-based permissions, allowing only those employees who require it for their roles.
- Use monitor logs for unusual login or transaction patterns.
- Immediately revoke credentials when employees change roles or leave.
5. Ongoing staff training and awareness
- Train administrators and staff to recognize and report phishing attempts and suspicious digital activity.
- Conduct regular tabletop exercises to simulate cybersecurity incidents and validate response effectiveness.
- Foster security awareness by reminding staff that mitigating cyber risk is everyone’s responsibility.
6. Oversight and vetting of vendors
- Perform due diligence when selecting third-party vendors or payment processors.
- Require independent penetration testing and security attestation from partners.
- Include data security, breach notification, and indemnification clauses in vendor contracts.
7. Incident response and recovery
- Develop, document, and test incident response plans for data breaches or unauthorized payments.
- Ensure plans address participant communication, regulatory notification, and the rapid restoration of systems.
- Practice business continuity drills to minimize downtimes and safeguard ongoing plan operations.
Modernize with Congruent Solutions
Congruent Solutions brings over two decades of proven experience in the retirement plan industry, delivering tailored technology and outsourcing solutions to plan administrators, recordkeepers, and TPAs.
Congruent Solutions specializes in modernizing retirement plan administration with its cloud-native CORE 2.0 platform, offering scalable, secure, and compliant solutions. As the IRS phases out paper checks, Congruent’s expertise and advanced cybersecurity framework, including encryption, ERISA-compliant monitoring, and AI-driven threat detection, ensure a seamless and secure transition to electronic payments.
