Failure To Diversify: ERISA Violation



Following an investigation by its Employee Benefits Security Administration (EBSA), the Department of Labor won a settlement for the participants of an employer sponsored retirement plan, arguing that fiduciary breaches, including failure to diversify plan assets, had led to diminished retirement savings.



The fiduciary responsibilities of retirement plan sponsors don’t stop with choosing an investment manager, offering investment options and hoping participants get good results. Fiduciaries must exercise prudence with the options offered—and continuously monitor all service providers. Failure, including inaction, comes with consequences, as litigation initiated by the Department of Labor (DOL) in 2019 illustrates. Filed in the U.S. District Court for the Southern District of New York, this DOL lawsuit alleged “that defendants violated the Employee Retirement Income Security Act by failing to diversify the plan’s assets to minimize the risk of large losses and failing to act prudently and loyally in managing these assets when the investment manager invested the plan’s assets on a highly concentrated basis in a select number of securities.”


The 2019 claim specifically focused on how the investment manager had invested 45% of plan assets in the stock of a single company. When the value of that stock dramatically dropped,“the plan’s participants experienced significant losses to their retirement savings because of the…concentrated portfolio.” DOL leaders point out that this investigation and settlement underscores commitment to holding retirement plan fiduciaries accountable to the standards of ERISA:


“This resolution protects the rights and benefits of the plan’s participants and shows that we will aggressively pursue appropriate legal action to ensure those rights and benefits,” said Solicitor of Labor Seema Nanda. “Fiduciaries to retirement plans must comply with the Employee Retirement Income Security Act’s safeguards – including diversification – to protect workers’ retirement benefits and fulfill their own fiduciary responsibilities.”

“This settlement restores hard-earned retirement funds for more than 9,000 participants….The U.S. Department of Labor is determined to investigate and seek remedies for potential violations of the Employee Retirement Income Security Act,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez.

Important to Know

The Department of Labor’s Employee Benefits Administration (EBSA) regularly pursues violations of ERISA, recovering funds for retirement plan participants. Civil corrections, litigation and even criminal indictments are all possibilities for plan fiduciaries under the high standards of ERISA. Legal experts at Morgan Lewis report that from October 2021-September 2022, EBSA investigations “recovered more than $1.4 billion for plans, participants, and beneficiaries, with $931 million being recovered through enforcement actions.” Examples of civil violations related to pension plans include: “Failing to operate the plan prudently and for the exclusive benefit of participants; and, failing to properly select and monitor service providers.”


To assist plan sponsors in succeeding with their fiduciary duties, the DOL’s EBSA division offers these compliance resources. Additionally, the DOL offers resources to help plan sponsors better understand ERISA. Related specifically to consideration of investment options, attorneys at Fisher Phillips remind us that although the particulars are not dictated by ERISA, the law “instructs fiduciaries to show the care, skill, prudence, and diligence that a prudent person would exercise when choosing an investment option to minimize the risk of large losses.”


Lawsuits continue to place intense scrutiny on how the investment options offered participants are selected, benchmarked, and, if warranted, removed from the plan. Allegations against fiduciaries include not just failure to prudently monitor, but also failure to act by promptly removing poorly performing investments from the options provided to participants. As attorneys at Nelson Mullins Riley & Scarborough sum up: “A plan fiduciary is duty-bound to take independent and ongoing actions to ensure the prudence of…options.” Despite diligence, however, plan sponsors must understand that no amount of effort can fully eliminate the risk of being held personally accountable for a breach of fiduciary responsibilities. Given the inherent risks, protection is a best practice for plan sponsors, and Colonial Surety offers affordable and efficient protection.


In the event of a lawsuit, Colonial’s Fiduciary Liability Insurance covers defense costs and penalty limits up to $1,000,000. Additionally, at no extra cost, we automatically include Cyber Liability Insurance to protect your plan and business. Our annual premium costs less than just one hour with an ERISA lawyer if confronted with allegations. Get protected in minutes, now:


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Pension Plan Professional?

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