Study Finds Most Corporate Retirement Plans Have Regulatory or Fiduciary Violations

More than eight in 10 (84%) retirement plans have at least one likely Employee Retirement Income Security Act “red flag” violation that puts them at regulatory risk or indicates their failure as a fiduciary, according to Abernathy Daley 401k Consultants.

To come to this conclusion, Abernathy Daley analyzed the most recent Form 5500 filings for 764,729 plans. The company looked for what it considered “red flag violations,” defined as “infractions, fineable offenses, fiduciary failure, or plan malpractice” in two categories: regulatory infraction red flags and egregious plan mismanagement red flags.  

Regulatory infraction red flags were found at 43% of companies across the U.S., and egregious plan mismanagement red flags at 76% of American-based companies, per Abernathy Daley’s study. Therefore, the company says, in its opinion, more than 600,000 American companies could be at potential risk of fines, legal penalties and fiduciary failure.

According to Abernathy Daley, regulatory infraction red flags are “the most severe violations, which represent issues within the retirement plan that can result in civil legal penalties, discovery leading to trial, or both.” The categories of plan failures Abernathy Daley considered were:

1. Loss from fraud or dishonesty;
2. Not offering qualified default investment alternatives;
3. An insufficient fidelity bond; and
4. Not 404(c) compliant.

The egregious plan mismanagement red flags may not necessarily result in a fine, but they represent failure of the plan administrator in its fiduciary duty to the plan sponsors, and the plan sponsors in their fiduciary duty to employees. These infraction categories were:

1. Not including automatic enrollment;
2. No corrective distribution of excessive contributions;
3. No 404(c) with participant-directed accounts; and
4. Failure to transmit payments on time.

Abernathy Daley previously released a study showing that it believed nearly 80% of companies with at least 100 employees are overpaying on administrative fees for their 401(k) and 403(b) plans (see “Many Plan Sponsors Appear to Be Overpaying DC Plan Fees”).

“Retirement plans represent a fiduciary duty toward employees and provide an essential competitive advantage for talent acquisition and retention,” said Abernathy Daley President Matthew Daley in a statement. “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.”