Breach of Fiduciary Duty by a 401k Provider

Breach of fiduciary duty takes place when a person who has a fiduciary duty acts in the interest of themselves and does not serve the interests of the person to whom they owe their fiduciary duty.

As provided by the federal Internal Revenue Service (IRS), a 401 k plan is a tax-qualified retirement account. A 401 k plan is a common benefit employers offer to their eligible employees. It allows employees to deposit a portion of their paychecks into a 401 k plan on a regular basis through automatic withholdings done by the employer.

In this way, over a period of years a person is able save the money they need to live on in retirement. With very limited exceptions, 401 k plans are regulated by the Employee Retirement Income Security Act (ERISA).

A fiduciary, such as a 401 k provider, must be free of conflicts of interest and may not use the 401 k plan participants and their beneficiaries for their own personal advantage. In other words, a fiduciary must use plan assets and property to make plan investments that bring advantage to their plan participants and not to themselves.

If a person’s 401 k has been mismanaged, they may find that they do not have the funds that they expected to have in their 401 k account for their retirement plans. In certain circumstances, they may be able to take legal action against their 401 k provider. In general, an employee can sue a 401 k plan investor for what is known as a “breach of fiduciary duty.”

What Is a Fiduciary?

Fiduciaries are people in fiduciary relationships, which is a special legal relationship with other people. A fiduciary relationship is characterized by the following:

• A high level of power held by one party, that is the fiduciary
• A high level of trust by the other, the trustee, in the fiduciary.

Examples of fiduciary relationships include those of a lawyer and their client, a doctor and their patient, and 401k investors and their trustees. A fiduciary is in a position to cause a lot of harm to their trustee if they breach their duty to them. This is why fiduciaries are expected to act with a high degree of care in fulfilling their responsibilities to their trustees.

What Are the Important Responsibilities of a 401 k Fiduciary?

A 401(k) fiduciary has important responsibilities that are subject to strict standards of conduct because they act on behalf of 401 K participants and their beneficiaries. These responsibilities include:

• Acting in the best interest of plan participants and their beneficiaries
• Acting in such a way as to provide the best possible benefit to the plan participants and their beneficiaries
• Carrying out their duties with the appropriate caution
• Following the plan documents
• Diversifying plan investments and assets
• Paying only reasonable plan expenses.

As noted above, many employees contribute to their 401 k plans through regular paycheck withdrawals. If a plan provides for this form of contribution, then the plan investor must deposit these contributions as soon as is reasonably possible, but no later than the 15th business day of the month following the payday. If the plan investor is able to make the deposits sooner, they need to make them when they are able.

When Is a 401 k Fiduciary Held Liable for a Breach of Duty?

A 401k provider may be held liable for a breach of duty if the selection of investments by the plan’s investors has not been prudent. However, it is important to note that there will likely not be a breach of duty if the investors give plan participants several investment options from which to choose.

In addition to making prudent investments, 401 k plan investors are required to make certain disclosures. For example, they must fully disclose the terms of the plan in language that the participants can understand. Participants must also be made aware of any subsequent changes that occur to the terms of the plan.

What Are Consequences of a Fiduciary Breach?

When a court determines that a fiduciary has breached their duty of care, the fiduciary will be required to return any profits made through the use of plan assets. They will also be subject to any additional penalties that the court deems appropriate. The plaintiff can also recover for punitive damages, particularly if the plaintiff proves that the defendant’s breach was due to malice or fraudulent misrepresentation.

What Defenses Do I Have if I Am Accused of Breaching a Fiduciary Duty?

A typical defense to an allegation that a person breached their fiduciary duty is to prove that the fiduciary acted within the boundaries and agreements of their fiduciary position. The following defenses can be used for breach of fiduciary duty by a 401k provider:

• The provider was not a fiduciary
• The statute of limitations has passed for a victim to bring suit
• The fiduciary actions were within the bounds of the fiduciary relationship
• The other party also contributed to the wrong and also committed a breach.

With these responsibilities, there is also some potential liability. However, there are actions that a plan provider can take to show that they have fulfilled their responsibilities, as well as ways to limit liability if it is established.

One strategy is to avoid any potential liability by using proper investment methods. A fiduciary is obligated to carry out the functions of a 401 k plan and not to produce guaranteed results.

For example, a plan’s investments do not have to produce constant increases in the value of plan investments. Rather, a plan investor is obligated to put into effect a prudent overall approach with a diversified investment portfolio for the plan. A fiduciary wants to be able to document their decision-making process in order to be able to prove the reasoning that went into decisions when they were made.

A fiduciary may limit their potential liability in other ways. They can set up their plan in such a way that it gives the plan participants control of the investments in their accounts. This approach must include a way for the participants to gain access to the information they need about the investment options offered by the plan. The participants have to be assisted in making informed investment decisions.

If such an approach is done well, this type of plan may limit the plan fiduciary’s possible liability for the investment decisions made by participants. A 401 k investor can also hire a service provider to handle some or even most of the duties of the fiduciary. The agreement between the fiduciary and the investor may assign potential liability to the service provider.

Do I Need to Consult an Attorney about 401(k) Fiduciary Duties?

Fiduciary duties associated with retirement plans can be complicated and confusing. If you believe that a fiduciary of your 401 k has breached a fiduciary duty to you, you should contact an experienced employment lawyer.

LegalMatch.com can quickly connect you to a lawyer who can advise you regarding the duties a 401 k investor has to you, whether they have been breached and what remedies you may have in the event of a breach. Your lawyer would be able to represent you in a case against the investor and get you the best possible result.