401(k) Plans and Your Rights

For employees, 401(k)s are among the most common types of retirement plans offered by employers. These defined contribution plans are easy to monitor, there are multiple investment options, and you can do a rollover 401(k) if you leave the job.

Most employees only think about the market fluctuations of their investments. However, employers and plan administrators owe participants a fiduciary duty. If plan sponsors don’t manage retirement accounts properly, they can be liable as plan fiduciaries. If you have questions about fiduciary standards for employer plans, talk to a 401(k) attorney for legal advice.

How Do 401(k)s Work?

There are several different types of retirement savings plans offered by employers. Qualified plan investments include:

• 401(k)
• 403(b)
• SEP-IRA
• Pension plans
• Profit-sharing plans

The term 401(k) comes from the related section of the Internal Revenue Code (IRC). Employees can defer a percentage of their salary to invest in an employer-sponsored 401(k) plan. Many employers match the employee’s contribution, up to a set limit. Employees can make higher contributions under a 401(k) than under a traditional IRA.

Who Regulates 401k Plans?

The Securities and Exchange Commission (SEC) does not regulate retirement plans, including 401(k)s. Retirement plans are regulated by the U.S. Department of Labor (DOL), under the Employee Benefits Security Administration (EBSA).

What Is ERISA?

The Employee Retirement Income Security Act of 1974 (ERISA) establishes minimum standards for employer-sponsored savings plans. ERISA also covers some health and benefit plans. Qualified plans have to meet minimum standards. These include requirements for notice, participation, accrual of benefits, and vesting.

What Happens When Your Employer Mismanages Your 401(k) Plan?

Employers have a fiduciary duty when it comes to investment decisions for benefit plans. This includes limits on reasonable fees for financial services, disclosing all conflicts of interest with the investment company, and maintaining plan records. Employers also have a duty to plan participants to deposit employee contributions in a timely manner.

As an ERISA fiduciary, employers have an obligation to act in the best interests of plan participants and beneficiaries. If your employer mismanages the plan, they could be subject to liability and penalties for ERISA violations. ERISA fiduciaries are responsible for:

• Defraying reasonable costs of plan administration
• Diversifying investments to minimize risk
• Follow plan requirements
• Avoid conflicts of interest
• Monitor investment management

The EBSA can regularly audit benefit plans to ensure regulatory compliance. Employee complaints can also trigger government audits. ERISA penalties include fines, payments to employees, and changes to plan company practices.

In some cases, there are criminal penalties for ERISA violations. Penalties can include up to 10 years in jail and fines of up to $500,000 for company violations.

What Rights Do Employees Have Over 401(k) Plans?

You can file a claim against plan administrators for losses and breaches of fiduciary duty. As a plan participant, you can file a civil claim against plan managers or administrators for lost earnings or improper benefits. Generally, you must exhaust administrative remedies before you can pursue civil claims.

Some 401(k) mismanagement claims go through mediation before litigation. Mediation is a form of alternative dispute resolution (ADR). The benefits of mediation are that it is faster, less expensive, and allows the parties to come up with their own ways to resolve the dispute. If mediation is not successful, you can take your case to court.

Most ERISA violations fall under federal law. These civil cases are generally administrative law cases held before a federal judge. Individual claims may include loss of coverage or denied coverage. Broader claims may include breach of fiduciary duty or failure to follow ERISA requirements.

Can a Securities Law Attorney Help With 401(k) Claims?

Managing 401(k)s and the rules for fiduciary duty are not always clear. Sometimes what is a reasonable fee to the plan administrator may not be the same as reasonable to the employee. If you are concerned about the ways your company is administering your 401(k) contributions, talk to an experienced attorney. Contact a local 401(k) securities law attorney for advice.