avoiding 401k litigation


Failing to manage your company’s 401k plans in an effective and forward-thinking way could potentially result in 401k litigation that could cost you time and money. Your business has a fiduciary duty to your employees to manage their funds in a proactive and practical manner. Here are some points to keep in mind when managing your fiduciary responsibilities in connection with your company’s 401k plan.

What Is a Fiduciary?

A fiduciary is a party who acts as a trustee to safeguard and manage financial assets. If your company offers a 401k plan, you are required to act in the best interest of your employees when managing this plan as part of your fiduciary duty. The Employee Retirement Income Security Act of 1974 (ERISA) further defines a 401k fiduciary as someone who “exercises discretionary control or authority” over the management of these plans.

Adhering to Requirements Established by the U.S. Department of Labor

The Employee Benefits Security Administration of the Department of Labor has outlined the basic 401k fiduciary duties of employers:

  • To act only in the best interests of participants in the plan and any beneficiaries
  • To carry out their fiduciary duty in a prudent manner
  • To diversify the investments of the plan
  • To pay only those expenses that are considered reasonable and customary for 401k management
  • To follow the plan documentation unless it directly conflicts with ERISA requirements

Failing to meet these standards and to live up to your legal responsibilities could result in a 401k lawsuit against your company as well as action by the federal government under the provisions of ERISA. This could potentially cost you credibility with current and prospective employees as well as creating significant financial liabilities for your institution.

Identifying Risk Areas

Some of the most common factors leading to 401k litigation or ERISA violations include the following areas of fiduciary responsibility:

  • Failing to disclose required information to plan participants on an annual basis
  • Excessive fees for 401k plans
  • Improper or incomplete recordkeeping
  • Failing to perform due diligence when selecting investments or working with a 401k management firm
  • Denying legitimate claims for benefits by current or former employees
  • Failing to evaluate the performance of plan administrators and to perform due diligence comparisons on a regular basis

Each of these issues requires immediate attention to avoid significant fines and penalties assessed by the Department of Labor. Additionally, if these problems result in a loss of actual or potential financial resources by employees, your company could be the target of a 401k lawsuit.

Evaluating the Performance of Your Current 401k Plan

Whether your company manages its 401k fiduciary responsibilities in-house or works with an outside financial company to manage these funds, it is critical to take a look at the comparative performance of these investment funds on a regular basis. This can help you to stay in compliance with ERISA requirements for acting in the best interests of participants in the plan and to carry out your fiduciary responsibilities in a prudent manner. If your fund is underperforming, it may be time to consider other alternatives in the financial marketplace to reduce the risk of a 401k lawsuit against your company. These options may include outsourcing your 401k administration to an outside company for the first time or changing companies to ensure the highest performance for your company’s 401k plans.

Avoiding Legal Action Over Excessive Fees

One important benchmark to consider when reviewing your 401k management plan is the fee structure associated with administering these investments. Regular evaluation of the fees and expenses associated with your employee’s 401k funds can help you determine if these expenses are customary and reasonable and if they represent the best use of your available funds. Doing a bit of comparison shopping can often help you to avoid 401k litigation arising from excessive fees. This can also help your company to demonstrate due diligence and to avoid adverse actions by the Department of Labor.

Creating a Comprehensive Management Plan

Establishing an integrated plan that incorporates regular reviews of your 401k fund is critical to ensure that you stay on the right side of ERISA regulations and reduce the risk of legal action against your company. Some of the most important administrative elements of your plan include the following:

  • Making sure that you adhere to ERISA regulations and requirements, including document retention rules and participant disclosure
  • Maintaining diversification of your funds in accordance with ERISA rules and best practices within the investment field
  • Providing required notifications and information to participants in your plan
  • Obtaining and maintaining coverage under an ERISA fidelity bond
  • Adhering to all provisions of the 401k plan as set forth by the documentation you have provided to your employees
  • Depositing all employee contributions into the 401k plan in a timely manner

Your management plan can provide a framework for handling all aspects of your 401k plan from the initial selection of your 401k provider to determining eligibility and processing payouts for participants in these programs. This can reduce the risk of litigation related to your 401k plan and can help you stay in complete compliance with all regulations and legal requirements of ERISA.

Reducing Your Risk of Lawsuits

The most important step your company can take right now to reduce your risk of legal action based on the handling of your 401k fund is to review all aspects of your plan from fees and expenses to investment performance over time. Performing a cost and performance comparison can be a good first step toward protecting your company from litigation and ensuring the most practical benefits for your employees. This can also protect your company from significant financial penalties and lawsuits that can result from violations of ERISA provisions.

At Quintes, we specialize in providing start-to-finish support for employers in setting up and maintaining 401k plans that work for employees and comply with the letter of the law. We can help you with comprehensive administrative services that can relieve your staff members of the burden of these complex financial responsibilities. If you prefer, the Quintes team can deliver advisory services that allow you to maintain control over your 401k options while ensuring the most practical guidance for your administrative professionals.

Give Quintes a call today at 831-759-3402 to discuss your company’s needs with a qualified 401k specialist. We look forward to the chance to serve you.