If your employer offers a 401(k) plan, it has certain responsibilities to you as a plan participant. If it violates those responsibilities, which are laid out in the federal Employee Retirement Income Security Act of 1974 (ERISA), you may pursue legal action against your employer to recoup any losses you’ve suffered.

Because of expensive class action lawsuits brought by employees over their plans, some employers have made changes to their 401(k) plans to reduce the risk of future lawsuits, writes Gretchen Morgenson in a recent New York Times article. Here is a look at the changes some employers are making and how these changes could affect your rights as a 401(k) plan participant if your employer makes them.

How Employers Are Changing 401(k) Plans to Protect Themselves

Some employers have made changes that affect the rights of employees to pursue legal action over 401(k) problems such as excessive fees or inadequate investment options. These alterations include limiting how much time employees have to file a lawsuit, requiring that claimants file suit in a federal court near the company’s headquarters even if it’s inconvenient for the employee, and requiring that claimants pay the employer’s legal fees for the case if the employee loses the lawsuit.

These changes don’t necessarily mean employers will be more likely to win in court, but employees may be less likely to bring a suit if they don’t discover the problem within the allowed period, if the court they are required to use is too far away or if they risk having to pay the employer’s legal fees. And if employees are less likely to sue, employers might be tempted to make plan decisions that aren’t in employees’ best interests, though they would be violating ERISA by doing so.

A March 2015 memo from the large global law firm Proskauer Rose to clients and friends of the firm advises employers about how they can limit their liability when designing retirement plans governed by ERISA. The memo says that contractual statute of limitation periods and venue provisions may reduce the risk of being sued or of being found liable in a lawsuit.

Contractual limitation periods can be made shorter than the state’s statute of limitations if they still give plan participants a reasonable window to file a lawsuit. Recent cases have found two years from the date of benefits denial to be reasonable in a state with a 10-year statute of limitations, provided the plaintiff is informed of the limitation period. However, in another case, a court found 100 days to be unreasonable. In still another lawsuit, federal judges upheld a plan’s venue provision even though the Department of Labor tried to argue that the provision was incompatible with ERISA.

The memo advises clients that since courts have been upholding plan provisions “that conflict with statutory or case law procedural rules,” plan administrators may want to change their plans to limit their risk of lawsuits.

An Employer’s Responsibilities to 401(k) Plan Participants

“Plan sponsors are fiduciaries to the plans they've set up for their employees. Many employers don't understand the gravity of that responsibility,” says Stephen Rischall, a chartered retirement planning counselor and cofounder of 1080 Financial Group, a fiduciary registered investment advisor based in Sherman Oaks, Calif. “As a fiduciary they are legally obligated to look out for their plan participants’ best interests by monitoring the plan, assessing the reasonableness of fees and benchmarking performance.”

Employers must carefully follow the rules detailed in ERISA when they decide to offer a 401(k) plan to their employees. Even if they hire someone else, like a third-party financial services provider, to administer the plan and select the investments that will be available to employees, they can’t transfer all responsibility to that firm. (See Is Your 401(k) Administrator Competent?)

“Think of an airline. It must do more then sell passengers a ticket,” says Wayne Bland, a retirement consultant with Metro Retirement Plan Advisors, an independent investment firm in Charlotte, N.C., that provides objective financial consulting to plan sponsors regarding retirement plan design and implementation. Just as an airline is responsible for hiring a competent crew, selecting safe aircraft and providing routine maintenance, an employer must ensure that the 401(k) plan is properly maintained. That means seeing that the plan’s costs and performance are similar to those of its peers as well as communicating with participants in a timely fashion. “Employers that are not on top of this are exposing themselves legally,” Bland says.

Why Employees Sue Their Employers over Retirement Plans

If an employer breaches its fiduciary duty, Rischall says, any present or past plan participant can file a complaint and potentially sue. Reasons to consider pursuing legal action or at least filing a complaint with your human resources department or an industry regulator include these three:

  • Contributions aren't being deposited in a timely manner or are missing.
  • Investments offered seem restrictive or you're limited to a single fund family.
  • You're not being provided with clear disclosures showing how much you pay in fees.

Most lawsuits brought by retirement plan participants against the employer plan sponsors and other fiduciaries are class actions in which the participants allege that the plan has overpaid its service providers – usually record keepers and/or investment providers, says John C. Hughes, an attorney with The ERISA Law Group, a law firm in Boise, Idaho, devoted to ERISA and other employee benefit issues for employers, fiduciaries and benefit consultants nationwide. In addition, participants may allege that inappropriate investments were chosen for the plan.

It’s usually not worth the trouble for individual participants to sue because the losses they stand to recover are miniscule, Hughes says. Class action lawsuits typically allege that the plan paid higher investment expenses than it should have – say, 1% of the amount invested per year instead of 0.75% – and/or that a fund chosen for the plan didn’t have returns as good as those of a comparable fund that should have been chosen instead. While companies might pay millions to a group of employees as a result of these lawsuits, each participant might end up with just a few hundred dollars, he explains.

However, it might be worth it for an individual to initiate a suit if an investment really went south, which often happens when company stock is at issue, Hughes says. For example, in March 2016 employees of Fifth Third Bancorp, a Cincinnati, Ohio-based financial services firm, won $6 million in settlement of a class-action suit that claimed the company's retirement plan lost tens of millions of dollars by investing in the firm's own stock. (For related reading, see Business Owners: Avoid Enron-eqsue Retirement Plans and The Biggest Stock Scams of All Time.)

Know Your Rights

Under ERISA, employers have to give their employees certain documents related to the 401(k) plan, including a summary plan description (SPD) that tells them about the plan’s features (for example, who can participate, how long it takes for benefits to vest, how to claim benefits) and describes participants’ rights and responsibilities. Employers also must provide a summary of material modification within 210 days after the end of the plan year in which the employer makes changes to the plan that affect the SPD. Participants are also entitled to individual benefit statements that inform them about their account balances and vested benefits.

While many participants don’t read these documents, it’s a good idea to do so. If your plan sponsor hasn’t provided them, request them in writing. If your plan sponsor ignores your request, ERISA provides the potential to recover $110 per day as long as the failure or refusal persists, Hughes says.

Department of Labor regulations detail the requirement that plans must have claim and appeal procedures, and if a plan does not or is not abiding by its procedures, participants can notify the Department of Labor and/or go to court – a situation which will likely favor the participant if the employer has failed to comply with its own procedures.

The Bottom Line

It’s important to be aware of your rights as a 401(k) plan participant and to know whether your employer is upholding its responsibilities to you under ERISA. Your financial security in retirement may depend on it.

If you believe you are paying excessive fees, don’t have access to appropriate investments or are experiencing any other problem with your 401(k), you are entitled to talk to your human resources department, file a complaint with the Department of Labor and/or contact an attorney. (For further reading, see The 401(k) and Qualified Plans Tutorial.)

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