Top Compliance and Litigation Tips for 401(k) Plans

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Sometimes, in an effort to distinguish themselves, retirement plan advisors get too esoteric and complicated. ESG funds, managed accounts, pooled employer plans, health savings accounts and retirement income can and will be important to plan sponsors but just helping them to stay in compliance and avoiding litigation traps are and will continue to be top of mind ahead of other issues.

At recent TPSU programs, two attorneys presented on compliance and litigation. One, Jodi Green, partner at Tatum, Hillman & Powell, LLP and a former Department of Labor examiner, reviewed the “Top 10 Compliance Traps” while Carl Engstrom, partner at Engstrom Lee, who has brought multiple lawsuits, shared their insights. The plan sponsors were riveted at both.


Jodi shared a top 10 list of compliance traps which included:

  1. Not knowing EBSA’s prime and current focus, which can be reviewed on their website as well as recent results like monetary recovery and cases filed;
  2. Assuming that the DOL’s investigations are brought randomly (the biggest source is from the 5500 forms);
  3. A high number of terminated participants with vested balances, which can lead to self-dealing if the plan sponsor moves these balances to the forfeiture account and uses the funds to pay plan expenses or employer contributions;
  4. Not maintaining a complete and accurate participant census, which can result in missed employee notices and enrollments, and the inability to locate terminated participants for distributions;
  5. Late and delinquent deposits of participant contributions;
  6. Not considering the Voluntary Fiduciary Compliance Program to self-correct errors;
  7. Not understanding when attorney client privilege cannot be invoked (like when they advise the plan v. the plan sponsor or are paid by plan assets);
  8. Thinking that the DOL and IRS are not in frequent communication;
  9. Excessive fees found through the 5500 and fee disclosures; and
  10.  Thinking less is more—provide as much information as possible about the plan sponsor’s voluntary correction of errors (specifically for errors observable in the Form 5500 and audit)

Though many traps are obvious to industry professionals, they are not to plan sponsors who will appreciate not only being reminded of them but getting additional education and updates.


Fred Reish, partner at Faegre Drinker Biddle & Reath LLP, reviewed litigation tips at the May TRAU C(k)P training on the UCLA campus, but is industry friendly mostly representing defendants in ERISA lawsuits. Over a month later at a TPSU program at UCLA, prolific plaintiff’s attorney Carl Engstrom shared his insights, which also had plan sponsors riveted:

  • Process
    • Plaintiffs have the advantage as they present the facts most favorable to them, which are assumed to be true when defendants file a motion to dismiss in order to avoid costly discovery;
    • Fee disclosure and 5500 forms are the biggest source of litigation
  • Common claims
    • Record keeping costs especially using revenue sharing
    • Share class optimization or lack thereof (Engstrom mentioned the failure to use CITs or SMAs though Reish said that a case could be made to pay more for mutual funds)
    • Underperformance of funds especially target date funds lately
    • Other
      • Managed account fees
      • Self-dealing—proprietary funds of the provider or consultant/advisor
      • Failure to use stable value vs. money market accounts

Beyond the obvious (do a good job), Engstrom recommended that plans go to market every three-to-five years with an RFP and be cautious about who is benchmarking the plan because it can be easily manipulated by the pool of plans used.


The demand by plan sponsors for high quality education on the basics of running a plan has never been higher and though ESG, PEPs and managed accounts are sexy right now, do not forget the basics. And those that are seen as educators, along with conflict-free fiduciaries, will be trusted more than salespeople.

Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.

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