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401k Plan Sponsors and the Risk of Fiduciary Liability

February 21
21:51 2012

As a 401k plan sponsor…1025341_21253436_doubt_stock_xchng_royalty_free_300

    are you concerned…

  • …you don’t know what you need to know about your 401k plan?
  • …about fiduciary responsibilities, but aren’t exactly sure what it means in terms of your specific plan?
  • …your service vendors might have hidden conflicts of interest?
    are you unsure…

  • …your 401k funds are the right choices?
  • …what fees are being paid and where they are going?
  • …you don’t know enough to ask the right questions?
    You’ve got to ask yourself this one question:

  • Are you doing enough to reduce your fiduciary liability…
  • …or do you only think you’re doing enough to reduce your fiduciary liability?

Do you realize why these headlines should disturb you?

Those were just the small ones initiated by the DOL, here are the bigger settlements, mostly dealing with excessive fees:

Indeed, according to a Fact Sheet released by the DOL in February of 2011, nearly four out of five investigates resulted “in monetary results for plans or other corrective action” totaling in excess of $1 billion dollars in fines. If all this weren’t bad enough, the DOL now says it will hold 401k plan sponsors liable even if it is their service providers who fail to comply (“DOL tells employers when they must fire advisors to 401k plans,” RIABiz, February 10, 2012). Life just got a lot harder for 401k plan sponsors.

This historical litany of litigation, however, represents the mere tip of the fiduciary liability iceberg, according to several leading ERISA attorneys. Stephen Miller, Counsel at McDermott Will & Emery LLP in Chicago, Illinois explained the evolution of the 401k law suit to “For years,” he says, “many plan sponsors decided the potential for liability on ‘stock drop’ cases outweighed the possibility of ultimate victory, which resulted in numerous multi-million dollar settlements in breach of fiduciary duty lawsuits. This string of settlements created an environment where suits against 401k plans could be very profitable for plaintiffs’ lawyers, and in part spawned the next string of lawsuits involving breaches of fiduciary duties, this time related to administrative fee offerings.”

Today, it’s not any final court settlement that troubles benefit plan lawyers, it’s the precedent setting rulings coming from the courts. “I think the Edison-Tibble case is alarming because plan sponsor can be liable for not using the right revenue sharing funds,” says Ary Rosenbaum of The Rosenbaum Law Firm P.C. in Garden City New Jersey. The court ruled in the Edison-Tibble case the plaintiff’s suit can move ahead. The suit involved the plan sponsor using higher cost retail funds instead of lower cost institutional funds.

Matthew J. Borror, ERISA Attorney at the Law Office of Matthew J. Borror in Campbell, California sees another case as a watershed. “In my view,” says Borror, “LaRue remains the seminal court case because it allows for recovery despite the fact the breach did not affect the entire plan.” Unlike the Edison-Tibble case, which focuses on fees and investment due diligence, the LaRue case centers on administrative negligence. Specifically, the plaintiff was allowed to pursue the case against the plan sponsor, who he alleges failed to transfer his funds in a timely manner.

Why don’t we see the many court judgments? As Miller alludes to, many plan sponsors feel it’s less costly to settle. Indeed, Rosenbaum points out the $15 million claim against General Dynamics was a settlement. “The money came from their insurers and other sources,” he says.

“It’s not the courts or the DOL that pose the greatest risk to employers,” says Borror. “The greatest risk to employers is that their plan is vulnerable to a reasonable claim that it subjects participants to account-balance losses due to excessive fees, insufficient investment monitoring or failure to timely transfer employee deferrals into the plan.” Borror feels most plan sponsors determine the costs of defending themselves will exceed the cost of settlement at some level. Therefore, if they can settle at or below that level, it’s cheaper than going to court.

Miller thinks companies can win by going to court as “the cases are usually very defendable because the plaintiff’s burden to prove a breach is very high.” He says “recently employers have been on a roll successfully defending stock drop and administrative fee litigation, especially where the case has been taken to trial or at least through dispositive motions.” As a result, we haven’t seen many high damage awards coming from court rulings. Miller says, “the greatest ‘damages’ have typically arisen through settlements.”

Despite their success at trial, dangers still lurk in the foggy night of the court. Miller says “one type of case that more consistently presents significant fiduciary liability going forward involves improper or negligent notices of plan activities or amendments under ERISA Section 204(h). This type of claim typically is tagged on to a stock drop or administrative fee claim involving a pension plan, and can take on a life of its own if the procedures for giving the necessary notices were improper or lacking. Put another way, the 204(h) claims can turn an otherwise defendable case into real potential fiduciary liability due to a failure to comply properly with ERISA’s procedural notice requirements.”

Rosenbaum sees the DOL’s new Fee Disclosure Rule as opening the floodgates of litigation. “With fee disclosure regulations coming up,” he says, “I think you will actually see an upswing in lawsuits as plan sponsors will now have to be more diligent as it concerns paying reasonable fees because now they know how much they are being charged. They will run out of excuses.”

“The ERISA plaintiffs’ bar is a creative group, always seeking new avenues to bring participant-related lawsuits seeking liability from employers under 401k plans,” says Miller. “The administrative fee lawsuits appear to be slowing down recently, given a few positive court judgments for employers and regulatory activity by the DOL. ERISA’s notice provisions are always a ripe area for lawsuit activity, as ERISA’s complex regulatory system presents many hurdles employers sometimes do not always cross cleanly. Also, the recent CIGNA case may give new wind to ‘stock drop’ cases, where plaintiffs’ attorneys try to argue that legal damages for stock losses are really ‘restitution damages’ under plans. Time will tell where the plaintiffs’ bar focuses next. We try to advise our clients to follow ERISA’s notice and regulatory rules as closely as possible to make them undesirable possible defendants.”

With trillions of dollars tied up in corporate retirement plans, there’s no doubt trial lawyers see a ripe target for both class action suits as well as individual actions. And it’s the plan sponsor that typical wears the bulls-eye for any perceived sleight. Borror predicts “participants will continue to claim their account balances have been materially reduced due to failure of the fiduciary to either ensure the fees charged were reasonable in relation to the services provided, or to select and to monitor the retirement plan service providers with the skill of a prudent professional.”

With the potential of claims coming from so many directions, what’s a 401k plan sponsor to do?

“The costs of responding to any of these claims are astronomical when compared to the costs of making affirmative corrections,” says Borror. He offers this conclusion: “In short, any employer that even mildly suspects his or her plan is vulnerable to such a claim should have the plan reviewed by an independent professional.”

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. investment banking
    investment banking January 05, 18:29

    Good writeup, my investment adviser always said… Penny
    stocks are extremely volatile. This means the price of these stocks is changing on a constant basis.
    Therefore, if you plan on investing in penny stocks,
    it is important that you set up an exit plan, and when the time comes to exit, ensure
    you stick to this plan.

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    forex trading strategies pdf file February 13, 03:49

    This is a decent article, may father who was an adviser told
    me.. Begin by investing just a small amount into a particular stock.
    Do not invest all of your capital or savings. If you see that the stock
    is profitable, then you can begin to invest more. By investing too
    much all at once, the chance of you losing out on large amounts of money increases.

  3. Mark
    Mark December 09, 14:19

    the company I work for, has a non-degreed accountant acting as HR, by herself, and also as administrator of our 401k plan. We are currently under IRS audits due to past negligence on her part. They have just switched plans to a horrible company, the reason seeming to be having picked something for the sake of picking it, because of the current IRS auditing going on. The lawyer, who was handling it all, is now missing. This business owner does things like, claim his business is a domestic business in Nevada, to reap the tax benefits, but has no operations whatsoever in Nevada. There is truly “no” HR department, and no annual reviews or evaluations for employees. The business owner not only obtains a salary as a self-described “employee” but also an additional sum for “consulting” to his own company. He also rakes in the cash flow from private company stock.. Not one person in our company understands the 401k, the profit sharing plan, or the insurance that this one non-cpa accountant is in charge of administering.

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