The Employee Benefits Security Administration (EBSA) recently announced that retirement plan fiduciaries with a firm based in New York will pay more than $124.6 million for retirement plan asset mismanagement. Specifically, the fiduciaries mismanaged the profit-sharing portion of the plan. The lawsuit alleged that the fiduciaries’ failure to diversify investments caused significant losses to the retirement plan. Under the Employee Retirement Income Security Act (ERISA), fiduciaries have a duty to act prudently and in the best interest of the plan participants. To ensure that plans operate in accordance with prescribed standards, ERISA developed the Form 5500 series return/report that allows employee benefit plans to satisfy annual reporting requirements. Earlier this year, the  U.S. Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) released their final rule bringing changes to the 2023 Form 5500.

Background of the Retirement Plan Asset Mismanagement Case

An EBSA investigation found retirement plan asset mismanagement across the fiduciaries, constituting serious ERISA violations. Investigators found that the New York-based firm controlled 100% of the investments in the profit-sharing portion of the plan. Additionally, other fiduciaries of the plan failed to monitor the investment manager’s activities properly.

In one example, the investment manager invested all plan assets in the stock of a single pharmaceutical company. This stock concentration grew to more than 45% of the assets. However, the price of the stock fell dramatically. Subsequently, plan participants experienced significant losses to their retirement savings due to the retirement plan asset mismanagement and lack of diversification.

ERISA and Fiduciary Duties

ERISA limits the kinds of securities a plan may invest in. Section 407 of ERISA states that a plan may only invest in qualifying employer securities. Qualifying employer securities include company stocks and other equity securities. Under ERISA, fiduciaries must act prudently and:

  • diversify plan investments in order to minimize the risk of significant losses,
  • follow the plan’s terms to the extent they are consistent with ERISA, and
  • avoid conflicts of interest.

Section 1104(a) of ERISA specifically states that fiduciaries must diversify the investments of a plan so as to minimize the risk of large losses unless, under the circumstances, it is clearly prudent not to do so.

Judgment in the Case

The EBSA filed suit in the U.S. District Court for the Southern District of New York (District Court) alleging ERISA violations, including failure to diversify assets and act prudently and loyally in asset management. In its judgment, the District Court ordered the fiduciaries to pay more than $124.6 million to resolve the violations. Since then, the New York-based firm has taken steps to limit any investment concentrations in other plans it manages. In conclusion, employers should remember that such retirement plan asset mismanagement investigations are often aided by proper recordkeeping. This also helps ensure that employee benefits are kept secure. Therefore, ERISA states that employee records containing benefit information must be kept for at least six years after the filing date.