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Fiduciary penalties


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Let's suppose you have a somewhat typical small 401(k) plan - <100 employees. Some of them make deferrals - maybe 60% of them. Of these, there are a few - say a half dozen or less - who have not made an election as to what investments will be chosen, so they must be deposited into the "default" fund. Historically, this has often been a money market fund.

So here's the question: the employer must make the determination as to whether the fiduciary liability relief available by complying with the QDIA requirements is worth the potential hassle. While I would expect that most fiduciaries would want this protection, what potential penalties are there if they don't? I know there's a 20% civil penalty based upon the "applicable recovery amount" under ERISA if there's a settlement agreement with the DOL. Presumably a participant could bring suit for recovery of the difference between what they think they "should" have earned and what they actually earned - but these amounts are likely to be extremely small, and unlikely to be pursued in court. What else? For my own edification I'm trying to understand what the realistic risk is in most circumstances.

For additional discussion - could all or most of this be avoided more simply by a Plan Administrator having a deferral election which plainly states that the election is NOT valid UNLESS it is accompanied by an investment election? Of course this wouldn't help if there are employer discretionary or nonelective contributions for participants who aren't deferring, but if it is a straight safe-harbor matching 401(k) this might work.

Is an employer legally able to say, "make an election within the next 90 days or I'll fire you?"

Just looking to generate a little discussion.

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Wouldn't that be condition of employment? Same as requiring uniform or other behavior? IMHO I think if you offer some sort of advice/educational tool to all employees that will help them select investments you could mandate that elections are not valid unless they include the investment selections.


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