401(k) Mismanagement

ERISA governs 401(k) plans and related fee litigation. ERISA is a federal law that sets a minimum standard for retirement plans. Perhaps most importantly, it imposes a fiduciary duty standard on the managers of the project. According to the U.S. Department of Labor, the federal agency that enforces ERISA provisions, plan fiduciaries must:

  • Act solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them
  • Perform their duties with skill, prudence, and diligence
  • Act following the plan documents
  • Diversify plan investments
  • Pay only reasonable expenses of plan administration and placement of its assets
  • Avoid conflicts of interest

There is at least one plan fiduciary for every retirement plan (e.g., a company official), although there may be more than one, and often there is.

How a 401(k) Plan Works

The 401(k) plan can deduct fees from your account. Plan fiduciaries must ensure that prices paid to service providers and other expenses of the program are reasonable. 

Plan participants have a right to file legal actions, including:

  • Class actions against plan fiduciaries to recover damages for excessive fees based on breach of fiduciary duty
  • Mismanagement
  • Self-dealing

For example, in one recent case, a plan participant filed a proposed class-action lawsuit against the company that sponsored his 401(k) plan. The plaintiff alleged that the company breached fiduciary duties under ERISA by allowing the company to charge excessive administrative and investment fees. 

According to the complaint, the administrative fees charged to plan participants were more significant than 90% of peer plan fees. The lawsuit also alleged that the costs for the mutual fund investment options in the plan were up to three times more expensive than available alternatives in the same investment style.

The plaintiff also alleged that the company’s selection process was deficient because there were almost no passively managed fund options for plan participants, which resulted in inappropriately high administrative plan fees. The case was pending as of May 2019.

401(k) Plan Stock Drop

ERISA does not spell out precisely what kind of investment options a 401(k) plan must offer. It merely requires that plan fiduciaries show the care, skill, prudence, and diligence that a reasonably prudent person would employ doing the same job.  

Plan participants had sued plan fiduciaries where, for instance, the fiduciary failed to monitor the performance of an investment against an appropriate benchmark and take appropriate action when the investment significantly underperformed the benchmark for an extended period. Plan fiduciaries have also been sued for including the company’s stock in the plan.

The Supreme Court accepted a 401(k) lawsuit recently that could influence whether and how employers have company stock in their retirement plans. Plaintiffs in the case (Retirement Plans Committee of IBM v. Larry W. Jander) allege that plan fiduciaries by presenting IBM stock as an investment option to retirement plan participants despite knowing about non-public problems concerning its microelectronics business.

In October 2014, IBM announced the “sale” of its microelectronics business and disclosed that IBM would pay $1.5 billion to the “purchaser” to take over the division and supply IBM with semiconductors. IBM’s share price dropped over $12 per share after that announcement. 401(k) investors who invested in the IBM Company Stock Fund were damaged as a result.

The district court (i.e., trial court) dismissed the lawsuit, but the U.S. Court of Appeals for the Second Circuit reversed the district court’s decision.  IBM then petitioned the United States Supreme Court to hear the case, and the Court granted the petition, agreeing to listen to the situation.

At this time, the U.DS. Supreme Court has not ruled on the case. If the Supreme Court affirms the Second Circuit’s decision, plaintiffs in a 401(k) stock-drop case will have a much better chance of surviving a motion to dismiss, which increases the likelihood of a pre-trial settlement.

In a previous ruling in another case, the Supreme Court held that an employer is not entitled to a presumption that company stock was a prudent investment. However, at the same time, the Court made some ruling that arguably makes it more challenging to bring a 401(k) stock-drop case. 

For instance, a plaintiff’s complaint must state a plausible alternative action the employer could have taken. The Court also affirmed that an employer is not imprudent for failing to buy or sell stock based on “inside (non-public) information” in violation of insider-trading laws.

How Do I Know if My 401(k) Is Mismanaged? 

There are several “red flags” that 401(k) plan participants should not ignore. Among them are the following:

  • Excessive fees and expenses compared to comparable investments
  • A significant decline in the value of expenditures compared with an appropriate benchmark
  • Evidence of self-dealing by plan fiduciaries
  • Evidence that plan fiduciaries have interests that conflict with those of the plan participants.

How 401(k) Mismanagement Happens 

401(k) mismanagement can be unintentional or intentional. It can occur because of imprudence and negligence, or conflict of interest and self-dealing. Mismanagement could be as simple as plan fiduciaries buying costlier “retail” shares instead of less expensive “institutional” shares. Simple mismanagement, however, can result in significant losses and plan participants may be able to recover those losses. 

The Doss Firm, LLC Will Fight for Your 401(k)

If you believe you’re the victim of 401(k) mismanagement, The Doss Firm, LLC is standing by to fight for your money. 

The recovery of a 401(k) is vital to a client’s well-being and retirement. Jason Doss and his understand this and have fought for numerous clients over the years to get their money back. 

Don’t hesitate to call (770) 578-1314 for your free consultation on a 401(k) issue.

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