Eighty-four percent of U.S.-based retirement plans have at least one likely ERISA red flag from a regulatory and/or fiduciary violation, according to a new analysis released today by Abernathy Daley 401k Consultants.
“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.”
Abernathy-Daley President Matthew Daley
Abernathy-Daley analyzed the latest Form 5500 filings for 764,729 plans, identifying and tagging each plan with any red flags from their most recent filing. The findings indicate that over 600,000 companies could be at potential risk of fines, legal penalties, and fiduciary failure.
The New York City-based consultancy in 401(k) plan administration and employee education defines red flag violations as either “infractions, fineable offenses, fiduciary failure, or plan malpractice” and are separated into two main categories: Regulatory Infraction Red Flags (RIRF) and Egregious Plan Mismanagement Red Flags (EPMRF).
“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. “CFOs, HR leaders, and other key executives must work to ensure the design and administration of their plans align with legal and fiduciary requirements.”
Red flag violations common
The analysis found:
- 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).
- In total, approximately 84% of plans have at least one red flag violation that puts them at regulatory risk or indicates their failure as a fiduciary.
RIRFs are defined by Abernathy-Daley as “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 selected RIRF infraction categories were: 1) Loss from fraud or dishonesty; 2) Not offering qualified default investment alternatives (QDIA); 3) an insufficient fidelity bond; and 4) Not 404(c) compliant. Abernathy-Daley found at least 328,833 retirement plans had at least one RIRF, representing approximately 43% of the total plans.
Egregious Plan Mismanagement Red Flags (EPMRFs) 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.
The selected EPMRF 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 found at least 584,113 retirement plans had at least one EPMRF, representing approximately 76% of the total plans.
“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.”
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. 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.
SEE ALSO:
• 8 in 10 Plans Overpaying on 401(k) Fees, Finds Form 5500 Analysis
• EBSA Recovers Nearly $1.4B for Employee Benefit Plans, Participants