Many employers believe their personal liability as a fiduciary is protected by ERISA Section 404(c) when it comes to issues related to employees’ 401(k) benefits. In truth, this is not the case. Even with ERISA Section 404(c), employers may find themselves in court as related to employee 401(k) plans.
What is ERISA?
ERISA is the acronym used for Employee Retirement Income Security Act, which was written into Federal law in 1974. Originally created to regulate pension plans offered by employers, the act now includes language and legislation regarding other retirement plans, such as the popular 401(k) plans. Section 404(c) provides fiduciary protection to employers offering retirement plans, such as 401(k) plans to their employees, where employees are making investment decisions themselves. However, there are standards required in order for the employer to ensure they are protected. There are also circumstances in which an employee may be able to bring legal action.
Employers should consider carrying personal liability policies that protect them as the fiduciary in addition to complying with all ERISA standards.
Here are some examples of lawsuits brought against employers by their employees as related to 401(k) retirement savings plans:
- “A group of employees alleged that the newly selected outside plan administrator IMPROPERLY DELAYED TRANSFERRING FUND BALANCES in the plan from one investment option to another, as directed by the participants. Subsequently the employees sued the plan trustees to recover more than $1,000,000 in lost investment income. Defense expenses were $250,000.” (The Traveler’s Companies Inc., 2008).The final cost: $1,250,000
- “Legal action brought by employees alleged the wrongful elimination of a profitable investment option and improper selection of another and FAILURE TO MONITOR the actions of the outside investment manager. Defense costs were $358.000 and the court awarded plaintiffs $500,000 in damages.” (The Traveler’s Companies Inc., 2008)The final cost: $858,000
- “Two employees approaching retirement age discovered they had never enrolled in the company’s 401(k) plan. The employees sued the company and plan trustees alleging the plan ADMINISTRATORS FAILED TO PROPERLY ADVISE them how to enroll and the enrollment was not automatic. The value of the alleged lost benefits exceeded $150,000, and defense expenses were in excess of $200,000.” (The Traveler’s Companies Inc., 2008)The final cost: $350,000Even in an instance where an employer wins the court case and is not required to pay damages, the legal expenses alone may be detrimental. Coverage plans such as Travelers Bond & Financial Products’ Wrap+ Fiduciary Liability Policy protects both individual fiduciaries and plan sponsors. Contact me to learn more.