How to Avoid a 401(k) Lawsuit

Cost predictability is an important factor that has driven companies to 401(k) plans and moved them away from traditional defined benefit pension plans.  The traditional plans place the investment and funding risk on the employer, while in most 401(k) plans participants are responsible for investing the assets in their accounts, and employer contributions are discretionary or are set as a percentage of employee contributions.  One risk to the cost predictability of 401(k) plans that is often overlooked is the potential for class action litigation by plan participants.  In addition to the litigation costs, 401(k) lawsuits pit the company against its own employees, which lowers employee morale and reduces productivity.  Most 401(k) lawsuits involve fees paid from participant accounts, company stock as a plan investment option, or both.  Dozens of fee cases and hundreds of stock drop cases have been filed in the last few years.  While a number of things can be done to avoid a 401(k) lawsuit, even plans with state-of-the-art practices sometimes get sued.  However, not every preventative measure is created equal.  In the author's experience, there are three steps that can substantially lower the risk that a 401(k) plan will be the target of a lawsuit.  These steps are discussed in the attached article.