Employer liability concerns growing for 401(k) plans

[Guest llerner]

401k_question: It seems that employers are more concerned about their liability upon implementing a 401(k) plan than ever before. The vendors say offer employee education, a diversified and quality monitored fund selection, get a bond and that's it. However, as one employer put it, "Today I have no liability because I do not have a 401(k) I want to offer them this benefit, but they are "street smart" now and I want to know exactly what the risks are." A co-trustee can help but isn't it the employer's ultimate liability? Is there anyway he can cover himself completely from lawsuits, such as insurance specific to a 401(k) lawsuits? I can't find anything. This account has one officer and one CEO (the same). Any thoughts?

[Guest tschenk]

You're client is absolutely correct in worrying about the liabilities of

a 401(k) plan. I believe that this is the next arena that will attract

the product liability, silicone implant, and tobacco attorneys. ERISA

was written to protect the worker, not the employer. I believe

historians will look back and wonder what people were thinking when they

assumed that a common worker could save and invest a sum large enough to

float a retirement for 25-30 years! We just had a law firm do a pricey

research report for us about ERISA law, statutes, case law, and

commentary. Whew, the upshot was that you have to be pretty niave to

think that employees - or their beneficiaries - aren't going to come

after you when they figure out how little they have saved for retirement

compared to what they need. And it won't be that hard to craft a case.

I believe you could go to about any company today and after interviewing

a dozen employees, could come up with enough info for a class action

suit.

Tom Schenk

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[Jon Chambers]

Two words--procedural prudence. Sure, there are all sorts of ERISA scare stories, but if a sponsor is procedurally prudent--i.e., if they do the right things, like acting in the best interests of participants and beneficiaries, doing appropriate due diligence, hiring qualified advisors, periodically monitoring selections, etc., I doubt that they will get into any real trouble. The issue may be that they are too small to be able to afford the right advisors. In that case, a SIMPLE IRA might be the better choice, with lower limits but less liability. Fear of lawsuits is understandable, but, in my opinion, not a legitimate reason to refrain from offering a competitive retirement program.

[Guest JPCMPLS]

I agree with Mr. Chambers. Particularly if the choice is no plan or a 401(k) plan to allow employees to save for retirement. The reference to procedural prudence, a fiduciary concept is the correct standard for a plan sponsor to follow. In the face of a class action following the collapse of Executive Life,which resulted in significant plan losses to participant's "guaranteed investment contract accounts", the plan officials at Unisys were able to avoid liability in federal court by demonstrating that they had followed prudent steps in selecting and monitoring funds offered to employees. Also,insurance can be purchased to cover the costs of defending these claims.

[Guest Reese Watt]

How do fully-directed, brokerage accounts fulfill 404©? Especially the requirement to describe the investment alternatives? That is, a participant isn't deemed to have "control" unless he's given enought informatin to make an educated decision. It seems like an impossible task, given that the participant can invest anywhere he wants. Any comments or cases that apply to this issue?

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[Guest Mike W]

Would appreciate any guidance in finding substantive information on the liability concerns for Plan Sponsors who implement entirely Self-Directed plans.

Many Thanks!

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[Greg Judd]

While I have the utmost respect for some lawyers (especially our esteemed webgod here at Benefits Link!), I've always assumed the First Law of Legal Dynamics is "for every action, there's an unequal and litigious reaction." This 'law' may be interpreted in several ways--"whenever possible, take no action at all", "anyone can & probably will sue anyone else over anything", etc. I'd look askance at any attorney, let alone a squad of them, who couldn't make a convincing case that taking my next breath would bring legal doom down around my ears.

To date, 401(k) plans have seemed remarkably immune to significant participant-centric legal action. While I agree with Tschenk that more suits are sure to emerge, I side with several respondents who've correctly weighed the "act or not?" question & determined that long-term investing for future needs is the wiser course of action. Any investment advisor worth their salt will acknowledge that, long-term, it's less a matter of what you're invested in than whether you're investing.