4 Steps All Companies Should Take To Protect Themselves from a 401(k) Lawsuit 

How To Avoid Retirement Plan Litigation

In recent years, there has been a surge in class action litigation over 401(k) excessive fees and 401(k) plan forfeitures.

Litigation over 401(k) plans has resulted in hundreds of millions of dollars in settlements, significant reputational damage, and countless hours spent defending litigation instead of servicing clients. In addition to these costs, the Department of Labor restored close to $1.4 billion to benefit plans in FY2024.

Fortunately, many 401(k) lawsuits are preventable. Here are four steps advisors, plan sponsors, and other fiduciaries can take to significantly minimize their risk of being sued.

1. Create Internal Policies and Follow Them.

Every plan sponsor and fiduciary should have a written guide, even if it’s just one page, that lists the following:

• Who the plan service providers are.
• What each one does.
• Who makes decisions for the plan about investments and other plan features.
• How often do those decisions get reviewed.

Courts have repeatedly dismissed claims where the plan sponsors provided evidence that their plan had internal procedures about plan-related decisions and that these procedures were followed.

2. Benchmark the Plan’s Costs To Make Sure They are Reasonable.

One of the most heavily litigated claims against plan sponsors and advisors is that they permitted the plan to incur unreasonably high costs.

The regulations clearly state that the plan does not need to engage the least expensive provider, and cost is not the only criterion to determine whether provider or investment fees are ‘reasonable.’ What’s important is for the plan sponsor or advisor to take stock of each service provider’s services, evaluate them, and document their review.

3. Identify and Disclose All Real and Potential Conflicts of Interest.

Service providers should disclose their conflicts of interest to the plan sponsor, so that the sponsor can make an informed decision that aligns with their participants’ best interests. Sadly, not all providers do.

If the company that serves as the plan’s recordkeeper is also providing the investment options available to plan sponsors or receiving other indirect compensation from the investments offered by the plan, there may be a conflict of interest. Conflicts of interest can only be managed if they are disclosed.

4. Give Participants Clear and Complete Information About the Plan.

It is astonishing how many claims and 401(k) lawsuits could have been avoided had plan fiduciaries been more transparent in giving plan participants information. This could be as simple as sharing materials about joining the plan and how to invest through an email blast or mailing.

Tell participants in plain English what they need to know about the investment options, eligibility requirements, employer match, and other basic plan features.

Time and Preparation Are Key in Retirement Plan Management

Complacency about proper retirement plan management is a significant business risk, but there are easy ways to manage it.

Advisors and plan fiduciaries can use these steps to help plan sponsors ensure they are properly setting up their plans and staying out of trouble.

There are also many free online resources to help sponsors conduct fiduciary training, vet their service providers, and assess conflicts of interest that might impair their obligation to serve their participants’ best interests. Don’t wait for litigation to jump into action.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Welcome to the Team: Recruiting and Hiring Including Restrictive Covenants
2. Show Them the Money Wage and Hour Compliance
3. General Liability, Umbrella/Excess Coverage, Commercial Auto/Workers’ Compensation

This is an updated version of an article published on July 11, 2019 and updated on February 7, 2024. This article was most recently updated by the Financial Poise Editors.]

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