Which of the following describes a demographic failure?

The concept of demographic failure in the context of 401(k) plans primarily pertains to how the demographic profile of non-highly compensated employees (NHCEs) affects the plan's compliance and overall effectiveness. When there is a demographic failure, it indicates that the plan does not appropriately take into account the participation or performance of NHCEs, potentially leading to discriminatory outcomes against this group.

In this case, option C highlights that a demographic failure relates specifically to the demographic profile of NHCEs, which is a crucial consideration for ensuring that the plan offers equitable benefits. Plans must ensure that NHCEs are afforded the same opportunities and are not disproportionately disadvantaged when compared to highly compensated employees.

Understanding this definition underscores the importance of inclusivity and fairness in retirement plan design, specifically concerning contributions and participation rates among different employee classifications. In essence, proper recognition and management of NHCE demographics is vital to maintaining compliance and achieving the intended financial well-being for all employees involved in the plan.