Are You Legally Protected? The Hidden Risks in Corporate 401(k) Plans

The Hidden Legal Risk Behind Your Corporate 401(k) Plan

When you launched your company’s 401(k) plan, you likely viewed it as a fantastic perk — a tool to attract top talent and help your team save for the future. But there is a sobering reality that catches many business owners off guard: offering a corporate 401(k) plan also carries significant legal responsibilities that many owners do not anticipate.

Many executives and business owners do not realize the legal exposure that administrative mistakes or poor investment options within their company’s retirement plan may create. If something goes wrong, your personal assets — not just your business assets — could be on the line.

The following outlines hidden risks of business retirement plans, what your actual responsibilities are, and how to manage these risks through a prudent, well-documented process.

You May Already Be a Fiduciary

If you have discretionary authority or control over your company’s plan management or its assets, you are legally considered a fiduciary. Under the Employee Retirement Income Security Act (ERISA) — a federal law governing employee retirement plans — fiduciaries are held to a high standard of conduct. You are legally required to act solely in the interest of plan participants and their beneficiaries.

The Department of Labor and the IRS actively audit corporate 401(k) plans to ensure employers are meeting these standards, and ignorance is not a legal defense. If your plan charges excessive fees, offers underperforming funds, or suffers from administrative neglect, you could face claims from plan participants or penalties from federal regulators.

Common Compliance Traps

Most compliance failures do not happen out of malice. They usually happen because business owners are stretched thin.

Excessive Fees

One common trap is allowing excessive fees to eat into employee savings. Fiduciaries must ensure that plan administration and investment fees are reasonable. If you have not benchmarked your plan’s fees against the market recently, you might be overpaying while your employees bear the expense through lower returns.

Neglecting the Prudent Expert Rule

ERISA requires you to make investment selections with the care, skill, prudence, and diligence of a knowledgeable expert. If you do not have a background in institutional investing, managing a fund menu yourself can expose you to significant risk.

Late Remittance of Employee Contributions

The late remittance of employee contributions is heavily penalized. The Department of Labor strictly enforces how quickly payroll deductions must hit employee accounts, and consistently missing these deadlines is one of the fastest ways to trigger a federal audit.

You Don’t Have to Manage This Alone

You do not have to carry the burden of 401(k) plan management alone. Partnering with a specialized retirement plan advisor can help you manage your fiduciary responsibilities.

A qualified advisor can serve in a fiduciary capacity alongside you — either as a 3(21) co-fiduciary who shares investment responsibility, or as a 3(38) investment manager who assumes discretion over investment decisions. In either case, you retain fiduciary duty to prudently select and monitor the advisor.

The advisor can:

• Provide periodic fee benchmarking to help demonstrate that your plan’s costs are reasonable, supporting a prudent and well-documented process
• Monitor the fund lineup and recommend or make changes consistent with the plan’s investment policy statement
• Help establish a process designed to keep your plan aligned with applicable regulations and reduce the risk of common penalties, among others

Ultimately, delegating this specialized management does more than help manage your fiduciary risk. It can also support a well-structured plan designed to help your employees pursue their retirement savings goals.

Schedule a Plan Review

Your retirement plan should be an asset, not a potential legal liability. If you have not reviewed your plan’s compliance, fee structure, or fiduciary responsibilities in the last twelve months, it may be worth a closer look.

Schedule a retirement plan review with our team. We will analyze your current corporate 401(k) plan to help assess whether it is compliant with applicable requirements, cost-effective, and operating in the best interests of your employees and your business.