Better Safe Than Sorry – 401 (k) Lawsuit Prevention

by: Doug Griffith

As we are all aware, there are a lot of attorneys looking for work, asking probing questions trying to uncover a glitch in your 401 (k) armor. If you add that to a down market and an employee looking to blame someone else instead of assuming personal responsibility, you have a recipe for trouble. So how do we protect ourselves?

A recent article in the July-August 2000 issue of Plansponsor addressed the issue of "How Can Plan Sponsors Protect Themselves From Lawsuits If the Stock Market Suddenly Collapses?" The following is a brief summary of their 10 Steps to Prevent a 401 (k) Lawsuit:

1. Meet ERISA 404(c) regulations – in order to meet 404(c) requirements the plan must provide diversified investment options, adequate information for a participant to understand and make informed decisions and allow participants to direct their accounts and make changes within a reasonable time period. It sounds simple enough but the actual implementation can get quite involved.
2. Make sure all decisions put participants first – it is ok to buy from your uncle, just be sure that "because he is your uncle" is not the reason you are buying from him.
3. Offer a variety of plan options – more is not better but different probably is.
4. Educate employees – when employees lose money their first line of argument will be, "But I didn’t know".
5. Monitor investments – plan trustees have a fiduciary responsibility to evaluate investments on a continuous basis.
6. Monitor fees – fees do not have to be the lowest out there but they need to be reasonable. If you are paying more than normal, be able to justify the fees with services provided.
7. Allow participants to move money from one fund to another – there should be a system that the employee understands. It does not have to be immediate but the employee should know how to execute a change and how long it will take.
8. Know your service provider – why were they selected? Are they solvent? If there is a downturn will they be able to survive?
9. Document, document, document! - create a paper trail so you can justify decisions that were made.
10. Communicate, communicate, communicate! - participants are less likely to be upset if they are informed. Even if things are bad, employees want to know you are paying attention.

Don’t let an attorney or an irresponsible employee put your plan in jeopardy. Take some time to review your processes and make sure you are doing the right things. Talk to your attorney if necessary, but by all means ACT NOW!

Contact us to understand your role as a fiduciary and avoid those unnecessary lawsuits.