Most 401(k)s have at least 1 fiduciary ‘red flag’ violation: Is yours at risk?

2.      Egregious plan mismanagement red flags – These are defined as “red flags that may not necessarily result in a fine, but represent failure of the plan administrator in their fiduciary duty to the plan sponsors, and the plan sponsors in their fiduciary duty to their employees,” according to Abernathy-Daley. These infractions include failing to provide automatic enrollment, no corrective distribution of excessive contributions and failure to transmit payments on time. Abernathy-Daley found at least 584,113 retirement plans had at least one EPMRF, representing approximately 76% of the total plans. 

With Abernathy-Daley’s previous research demonstrating that over 80% of corporate retirement plans are overpaying on administrative fees, their analysts view these new findings as painting the complete picture of the current state of the corporate retirement plan industry: Plan administrators are not fulfilling their legal and fiduciary duties to plan sponsors, and plan sponsors are not fulfilling their legal and fiduciary duties to their employees. Simply put, it’s an indictment of the system, according to Abernathy-Daley.
For CFOs, HR leaders, legal and compliance departments, and other key executives – taking corrective action to ensure ERISA compliance is essential. Given Vanguard’s $106 million SEC settlement in January, the time to document, educate, and benchmark plan offerings is now, according to Abernathy-Daley.

On January 21, 2025, Vanguard agreed to pay more than $100 million in fines to the Security Exchange Commission for misleading investors regarding their Target Date Funds, along with $40 million in fines to 401(k) plan participants. Also, in January, other employers, including Southwest Airlines, American Airlines and JPMorgan, have been sued in class action lawsuits, alleging ERISA violations.
 
Other findings:

• 43% of companies across the United States have at least one of four major red flag violations in their retirement plan that can lead to governance and compliance-related issues, which may result in violations, lawsuits, and/or fines (RIRFs). 
• 76% of American-based companies have at least one of four major red flag violations that represent a fiduciary failure from either the plan administrator or plan sponsor (EPMRFs). 

“Plan sponsors and employees are not only overpaying for their retirement plans on a widespread scale; they are also being underserved and exposed to unplanned and potentially damaging legal, compliance, and financial risks,” said Steven Abernathy, CEO of Abernathy-Daley. “CFOs, HR leaders, and other key executives must work to ensure the design and administration of their plans align with legal and fiduciary requirements.” 
 
In 2024, the Employee Benefits Security Administration’s (EBSA) legal proceedings restored nearly $1.4 billion to employee benefit plans, participants, and beneficiaries. EBSA’s ensuing criminal investigations resulted in 68 indictments and 161 convictions or guilty pleas, including from plan officials and corporate officers. 

“Retirement plans represent a fiduciary duty toward employees and provide an essential competitive advantage for talent acquisition and retention. Yet, these alarming findings clearly show that administrators are not keeping plan sponsors out of harm’s way and plan sponsors are not offering their employees a bulletproof retirement plan,” said Matthew Daley, president of Abernathy-Daley. 
 
“As a result, hundreds of thousands of unknowing American businesses could conceivably face considerable regulatory and fiduciary penalties. We recommend implementing benchmarking audits to ensure corporate leaders remain in compliance and deliver the optimal solutions and choices to their employees.”