Who’s Liable for 401(k) Mismanagement?

Find out what employers are on the hook for.

By Christopher Lester , President of Somerset-based Professional Planning Services On Nov 2, 2015

The 401(k) market is flooded with “generalists”: Advisors who do the minimum because they know the minimum.

Advisors are not typically responsible for plan mismanagement, and place responsibility squarely on plan administrators. Anyone directly involved with the decision making regarding their company’s 401(k) plan can be held personally liable for plan mismanagement.

Legislation exposing business owners is ERISA (the Employee Retirement Income Security Act), enacted in 1974, requiring employers to keep track of plan fees and expenses. It requires employers to document and analyze fees and make responsible decisions as to whether the fees are vindicated based on the services provided. Failure to do so results in penalties for the employer and plan trustees.

Many companies believe that their responsibilities are lifted regarding ERISA, since they may be with a big-name firm or advisor. However, most big players in the 401(k) market include clauses that release the advisor and the firm from responsibility and place it on the employer.

One important piece of legislation was LaRue vs. Dewolff in 2008, which granted employees the right to sue the employer directly for restitution for plan mismanagement.

Another lawsuit, Tibble vs. Edison International (May 18, 2015), also made it easier for employees to sue employers over plan mismanagement.

Edison used higher cost mutual funds based on its 401(k) provider’s suggestion. The mistake was not in using the higher cost funds, but for failing to ASK whether lower cost funds were available.

In the case, the US Supreme Court also determined that the duty of prudence and due diligence regarding monitoring the plan fees was ongoing, and no statute of limitations could be applied.

To ensure your plan is being managed properly, there are a few steps you can take:

The Department of Labor has adopted the Best Practice Standards as defined by the AICPA (American Institute of CPAs). Employers are now responsible for providing proof of these standards. Employers should ask their plan providers if they have documentation proving that their plan is compliant.

Find out if your advisor is a Traditional Advisor, an ERISA Section 3 (21) Advisor and/or an ERISA 3 (38) Advisor. The ERISA Section 3 (38) Advisor is the only advisor that acknowledges full investment responsibility, transferring all responsibilities and liability exposure to the advisor.

In closing, to protect yourself from being personally liable as a business owner or plan trustee, you need to take steps to make sure your plan is compliant.

About the Author: Christopher J. Lester, ChFC®, CCPS, is president of Somerset-based Professional Planning Services. He can be contacted at 732.302.1810.

 

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