Mitigating 401(k) plan fiduciary liability: with fiduciary liability rising--a particular threat to small and mid-sized companies--a consultant suggests ways to both limit liability and offer employees a better plan.

AuthorStone, Donald
PositionBenefits

Suppose an angry participant or plaintiff's counsel confronts you, saying you have violated your responsibility as a plan fiduciary. How could you prove that you had met that responsibility? What could you show them? For many fiduciaries of 401(k) plans, the answer is: very little. And that presents the potential for litigation.

While 401(k) plans are the sole retirement plan savings vehicle for over 40 million participants--and an essential benefit for small and mid-sized companies--many employers offer them without being fully aware of the responsibility and potential liability that accompanies 401(k) plans.

With 2002 a record year for new civil suits--over 11,000--lawyers see an opportunity for litigation that "will be bigger than tobacco." While the giant Enrons grab headlines, most litigation involves smaller companies.

The Next Litigation Battleground?

Several factors have come together to increase the potential for litigation:

* The deepest bear market since the Great Depression is increasing scrutiny of how companies choose and oversee investments and the fees they pay for plan-related services.

* Small and mid-sized corporations often rely on their vendor for plan and investment oversight an approach fraught with potential conflicts of interest.

* Baby Boomers, and others, are finding that they may not have the money they expected to have when they are ready to retire.

* The Employee Retirement Income Security Act (ERISA) is one of the most complicated areas of federal law, and much of it is still being defined through the courts and regulatory action.

* Plan sponsors don't understand what they are required to do; the Department of Labor (DOL) estimates that 75 percent of all plans are out of compliance.

Possible Areas of Litigation

Litigation in the next few years is likely to focus on areas that have a high impact on participants" balances. Listed below are some of the critical areas of required plan sponsor over-sight that are likely to be the vanguard of future litigation.

* EXCLUSIVE BENEFIT. ERISA Sections 403(c) and 404(a)(1)(A) say that failure to operate the plan for the exclusive benefit of participants can result in personal as well as corporate liability. Plan assets cannot benefit the employer and expenses paid by the plan must be reasonable.

* VENDOR SELECTION, Selecting vendors is a fiduciary act according to the DOL's Advisory Council on Employee Welfare and Pension Benefit Plans. Employers who don't use a rigorous...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT