Companies Could Face Fines Over Retirement Plan Mismanagement

A recent analysis of government retirement plan filings suggests companies across the country could be falling short in properly managing their employees' 401(k) and 403(b) plans, exposing them to the possibility of regulatory fines and penalties.

The data reveals what some experts argue are widespread and systemic problems in how employers administer these tax-advantaged plans meant to help workers save for retirement. It also calls into question whether employees are getting the most value for their money in terms of fees and services.

Major Issues Uncovered

An analysis by consultancy firm Abernathy Daley 401k Consultants found a potential breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA) in approximately 84% of U.S. retirement plans.

Looking at the most recent Form 5500 filings for 764,729 defined contribution plans, the analysis identified more than 615,000 employers at risk for regulatory infractions, fiduciary failures, or other plan issues that the company deemed as possible malpractice.

These employers could face financial consequences like fines—or in the worst cases, lawsuits—if found liable of mismanagement. Employees whose plans underperformed due to excessive fees or inferior investment options could also suffer in the form of lower account balances.

Two broad categories encompassed most of the red flags:

• Regulatory Infractions: Highly severe violations that can lead to civil legal penalties or even a trial, including loss from fraud or dishonesty and not being 404(c) compliant. Approximately 43% of companies were found to have at least one such infraction.
• Egregious Plan Mismanagement Red Flags: Situations that suggest imprudent or egregious management by plan fiduciaries, such as not including automatic enrollment and failure to transmit payments on time. Around 76% of companies were found to have at least one such red flag.

Fee Benchmarking Lacking

So, what's driving this apparent widespread mismanagement?

In the view of some experts, the root cause is likely that the majority of employers have not had their plans independently benchmarked and audited within the last three years.

Benchmarking by a third party lets companies compare their plan's fees and services against peers. This process helps fiduciaries fulfill their legal duty to ensure fees paid by the plan are reasonable.

Without regular benchmarking and reviews by experts, plans could unnecessarily overpay for administrative fees and investment options that underperform.

The scope of this issue implies employees may be losing large sums in their accounts. One executive cited the billions of dollars restored to retirement plans in recent litigation as evidence that workers and retirees are bearing the brunt through overpayments.

More Vigilant Oversight Needed

For employers offering retirement benefits, what steps can help avoid heightened risks and potential penalties? Experts believe that ensuring prudent oversight and management of the plan should be the priority. Employers should also leverage qualified experts to audit their plans and provide benchmarks. Some of the best practices fiduciaries should follow include:

• Conducting regular fee analysis and benchmarking every 2-3 years to identify fee discrepancies or excessive charges
• Reviewing investment performance and comparing to benchmarks to weed out consistently lagging funds
• Ensuring all required participant disclosures and filings are completed accurately to avoid technical violations
• Working with service providers that specialize in risk and compliance to avoid violations.

In this issue:

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Employers Expand Family Benefits Amid Reproductive Health Concerns

Companies Could Face Fines Over Retirement Plan Mismanagement

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How Workplace Accessibility Drives Profits

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