As the sponsor of a retirement plan at your business, you’ve probably heard the buzz related to ERISA investigations and lawsuits at big businesses with big names. Maybe you’ve shrugged, thinking these things don’t impact your relatively smaller business? Think again—and read on for guidance.
On The Rise: ERISA Cases Impacting Smaller Plans
If you missed this year’s PSCA National Conference, you missed more than a jolly time with fellow retirement plan sponsors in Las Vegas. Pension plan experts shared the latest on how “high-profile retirement plan lawsuits—including forfeiture allocation, excessive fee, pension risk transfer, and ESG-related litigation” are impacting the ERISA compliance landscape for all businesses, including smaller ones. In particular, small business owners need to be more alert to the fact that as ERISA litigation has “steadily increased since 2020,” so too has the focus on “smaller plans, excessive fees, and fiduciary breaches,” with settlement of these cases in 2024 averaging $4.6 million.
Essentially, the swirl of lawsuits against retirement plan sponsors over plan fees that began heating up in 2016, continues, and precedence established by the early cases, along with the use of AI to mine plan data, makes copy cat cases easy and lucrative. In many ways, small plans are an easy target, so it is key to understand the guts of excessive fee claims. ERISA risk management experts offer this snapshot of excessive fee litigation:
“ERISA prohibits a fiduciary from causing a plan to engage in certain transactions with a ‘party in interest,’ which the statute defines to include any person that provides services to the plan….ERISA then specifies that a contract for ‘services necessary for the establishment or operation of the plan,’ at a ‘reasonable’ cost, is not a prohibited transaction.” The lawsuits typically involve allegations that plan fiduciaries acted imprudently in overseeing and managing retirement plans (such as 401(k) and 403(b) plans), leading to alleged “prohibited transactions” that result in excessive fees for investment options, record-keeping services, and administrative management services.
Even as excessive fee accusations against plan sponsors continue, a new hot button area of ERISA litigation has emerged recently, related to how forfeited funds are allocated. The central issue being examined as forfeiture claims are hitting courtrooms is: “Does reallocating participant forfeitures to cover plan administration expenses constitute self-dealing?” Because self-dealing would be a violation of a plan sponsor’s fiduciary obligation to put the interests of participants and beneficiaries first, it’s wise to proactively prevent forfeiture allegations, following these expert pointers on risk management:
Plan sponsors should consider whether to remove from the plan language any discretion regarding the use of forfeitures…. Plan sponsors may also consider whether to amend their plan to specify that forfeitures must first be used to reduce employer contributions and then, if any forfeitures remain, those must be used to pay administrative expenses….Transparent communication with participants on the use of forfeitures — including clearly communicating the forfeiture process and how forfeitures are to be used — through the plan document, summary plan description and other plan communications is another important risk mitigation step to consider. Finally, plan sponsors should consider conducting regular audits to ensure that the forfeitures are being used in accordance with the plan document and applicable law.
As fiduciaries, it is insufficient for retirement plan sponsors to guard against lawsuits brought on behalf of plan participants: continuous compliance with the U.S. Department of Labor’s expectations related to the high standards of ERISA is essential. Among the areas of DOL enforcement that even plan sponsors from small businesses need to vigilant about are these three:
- Fiduciary investigations: The backbone of the DOL’s enforcement strategy will always be to focus on primary fiduciary duties and investigate any likely violation supported by evidence. Understand and exercise procedural due diligence.
- Salary deferral timing: The DOL has a long-standing and effective enforcement initiative into the timely deposit into plan trust salary deferral contributions. Fiduciaries should be processing these coincident with the processing of salary deposits.
- Missing Participants: The DOL temporarily suspended field enforcement policy regarding sponsors who escheat funds on missing participants. The enforcement was aimed at plan sponsors who failed to put procedures in place to make a good-faith effort to locate missing participants and remit their vested funds to them before escheating them to the state of residence.
Good To Know and Do: Voluntary Correction
Despite diligence, achieving error-free compliance with regulations for company sponsored retirement plans can be tough. Mistakes and oversights do happen, and catching and addressing them promptly is best practice. Updates made by the Employee Benefits Security Administration (EBSA) to the Voluntary Fiduciary Correction Program are now live, making it easier to self-correct common compliance issues, including the timeliness of submitting participant contributions to the plan. The Department of Labor offers this overview of the Voluntary Fiduciary Correction Program:
The Voluntary Fiduciary Correction Program (VFCP) is a voluntary enforcement program that allows plan officials to identify and fully correct certain transactions such as prohibited purchases, sales, and exchanges; improper loans; delinquent participant contributions; and improper plan expenses. The program includes 19 specific transactions and their acceptable means of correction, eligibility requirements, and application procedures. If an eligible party documents the acceptable correction of a specified transaction, EBSA will issue a no-action letter. Although the VFCP enables retirement plan sponsors to seek relief from enforcement actions associated with common ERISA fiduciary violations, once a plan is under investigation by the Department of Labor, applying to the VFCP to fix errors is no longer an option. This DOL Fact Sheet lists the types of transactions eligible for voluntary correction.
Remember, when you sponsor a retirement plan you are automatically a fiduciary under the high standards of ERISA, and, as the U.S. Department of Labor explains: “Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.” You can never fully eliminate the risk of being held personally accountable to the plan, participants and beneficiaries. Outsourcing plan services does not free you from your risks: as a sponsor, you choose the service providers and remain ultimately responsible for their success on behalf of plan participants and beneficiaries. As a fiduciary, you can even be held accountable for failing to adequately mitigate cybersecurity threats to the plan, or to curtail the damage from a breach. You can also be held responsible for failure to monitor your chosen service providers for their adherence to cybersecurity protocols.
If you face claims that you have failed in your responsibilities as a retirement plan sponsor, the only type of protection that shields you personally is Fiduciary Liability Insurance—-with it, you’ll be armed with coverage for defense and penalties. Without Fiduciary Liability Insurance, your personal assets are exposed. Colonial Surety Company offers an efficient and affordable Fiduciary+ Cyber Liability Insurance bundle specifically to protect retirement plan sponsors. For a few dollars a day, you’ll be armed with:
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