February/March 2009 / Human Resources
How to Avoid a 401(k) Lawsuit
In recent years, companies have moved en masse from traditional defined benefit retirement plans to 401 (k) plans. This move comes with a risk that often is overlooked: that the company will be subject to class action litigation by plan participants. Most 401 (k) lawsuits involve either fees paid from participant accounts or company stock as an investment option. Plans that offer company stock as an investment face a heightened litigation risk.
The Employee Retirement Income Security Act (ERISA) governs 401 (k) plans. It requires that a fiduciary or fiduciaries be named and defines fiduciary duties. Company fiduciaries can be personally liable.
Every attempt should be made to avoid 401 (k) lawsuits. In addition to their direct and potentially substantial costs, they can devastate employee morale and lower productivity. A well-constructed governance plan can head off most 401 (k) lawsuits and become the basis of a defense if one is filed.
The best governance structures use existing organizational structures and qualified staff with clearly defined roles. The governance mechanism should be devised to accommodate turnover in personnel, and its policies and personnel responsibilities should be accurately reflected in documents.
