Fiduciary Red Flags That Can Lead to an Audit or Lawsuit

Serving as the fiduciary of an employer-sponsored retirement plan is a significant responsibility. Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries must act solely in the best interest of plan participants and beneficiaries. Failure to uphold these standards can result in U.S. Department of Labor (DOL) investigations, costly litigation, and reputational damage.

While most plan sponsors have no intention of violating ERISA’s fiduciary rules, many infractions occur through oversight, misunderstanding of responsibilities, or insufficient internal controls. Recognizing potential “red flags” early is critical for avoiding compliance pitfalls and protecting both the plan and its fiduciaries.

Common Fiduciary Infractions

Some of the most frequent fiduciary missteps in 401(k) plans include:

• Late or Missing Participant Contributions – Not depositing employee deferrals into the plan as soon as administratively possible is a clear ERISA violation.
• Excessive Fees – Failing to monitor plan expenses or benchmark fees against industry norms can result in participants overpaying for investment management, recordkeeping, or advisory services.
• Poor Investment Oversight – Neglecting to review the plan’s investment lineup regularly to ensure options remain prudent, cost-effective, and diversified.
• Prohibited Transactions – Engaging in self-dealing, conflicts of interest, or transactions with parties in interest.
• Failure to Provide Required Disclosures – Omitting or delaying required participant notices, fee disclosures, or summary plan descriptions.
• Inadequate Documentation – Not keeping records of fiduciary decisions, investment reviews, or plan committee meetings.
• Ignoring Plan Documents – Operating the plan inconsistently with its governing documents.

Each of these violations not only invites potential regulatory scrutiny but also erodes participant trust and increases litigation risk.

Enforcement

Fiduciary breaches can be triggered by a wide range of actions—or inactions—related to plan administration, investment management, and participant communication. The DOL’s Employee Benefits Security Administration (EBSA) actively monitors compliance. In fiscal year 2024, EBSA’s enforcement activities recovered over $1.4 billion for plans, participants, and beneficiaries.

Five Key Red Flags

Some indicators that a plan may be drifting toward compliance trouble include:

1. Unexplained Delays in Contribution Deposits – If participant contributions are consistently delayed beyond the normal processing timeframe, it’s a sign of possible ERISA violations.
2. Lack of Fee Transparency – If a plan sponsor can’t clearly identify all plan costs or compare them to benchmarks, the plan may be overpaying for services.
3. Stagnant Investment Menu – A lack of regular investment reviews or performance monitoring can lead to outdated, underperforming, or overly expensive options.
4. No Documented Decision Process – Inadequate meeting minutes, missing investment policy statements, or lack of formal fiduciary training indicate weak governance.
5. Complaints from Participants – Repeated participant concerns about fees, investment options, or delayed account updates can flag deeper compliance issues.

How a Retirement Plan Advisor Helps Reduce Risk

An experienced retirement plan advisor is one of the most effective resources a plan sponsor can use to navigate fiduciary responsibilities. Advisors bring expertise in plan governance, investment due diligence, fee benchmarking, and participant education. Specifically, they can:

• Conduct regular investment reviews and ensure the plan menu meets ERISA’s prudence standard.
• Provide fee analysis and benchmarking to identify cost-saving opportunities.
• Assist with fiduciary training for plan sponsors and committee members.
• Help maintain proper documentation of decisions, reviews, and processes.
• Serve as a liaison with service providers to ensure compliance with contractual obligations.
• Offer support during DOL audits or participant disputes.

By engaging a knowledgeable advisor, sponsors can strengthen their fiduciary process, identify and address potential compliance issues earlier, and provide greater assurance to plan participants.

The Role of a Plan Committee

Forming a retirement plan committee is another effective strategy for ensuring consistent fiduciary oversight. A well-structured committee distributes responsibilities among multiple individuals, provides a formal governance framework, and ensures regular, documented review of the plan’s performance, fees, and compliance.

Key benefits of having a plan committee include:

• Shared Accountability – Responsibilities are clearly assigned, reducing the risk of important tasks being overlooked.
• Regular Monitoring – Committees typically meet quarterly or semiannually, ensuring timely reviews of investments, fees, and operational processes.
• Diverse Perspectives – Committee members may bring varied expertise from finance, HR, and operations, leading to better decision-making.
• Improved Documentation – Meeting agendas, minutes, and action items create a paper trail of fiduciary prudence.
• Enhanced Continuity – If one fiduciary leaves the organization, others remain to maintain plan oversight.

To be effective, committee members should receive fiduciary training, understand ERISA requirements, and operate according to a written charter outlining their duties.

Proactive Steps to Avoid Trouble

Preventing fiduciary breaches requires intentional, ongoing oversight. Best practices for avoiding DOL audits or lawsuits include:

Deposit Employee Contributions Promptly. Follow a consistent process and document deposit timelines.

Review Plan Fees Annually. Use benchmarking studies or independent fee analysis to confirm reasonableness.

Update the Investment Menu. Remove underperforming funds and consider adding low-cost index options when appropriate.

Document All Decisions. Keep records of investment reviews, service provider evaluations, and fiduciary training.

Follow the Plan Document. Review and update the plan document periodically to reflect current operations and compliance needs.

Engage Expert Support. Use advisors, consultants, or ERISA attorneys as needed to review the plan’s health and governance.

Final Thoughts

Fiduciary duties are both a legal requirement and a fundamental part of delivering a high-quality retirement benefit to employees. While the stakes are high—financial penalties, personal liability, and reputational harm—so too are the tools available to mitigate these risks.

By understanding common fiduciary pitfalls, implementing structured oversight through a plan committee, and engaging an experienced retirement plan advisor, sponsors can confidently navigate their responsibilities. This proactive approach not only reduces the likelihood of an audit or lawsuit but also helps ensure the plan continues to serve the best interests of its participants—today and into the future.

Informational Resources: Kaufmann Rossin: “Is Your 401(k) Oversight Putting You at Fiduciary Risk?” (May 9, 2025); Human Interest: “401(k) DOL Audit Triggers: What You Need to Know” (February 27, 2024); World Investment Advisors: “How to Handle Retirement Plan Audits With Confidence” (June 25, 2025); BPM: “The Top Five Most Common 401(k) Compliance Issues and How to Avoid Them” (January 29, 2024); Morgan Lewis: “Managing Welfare Plan Risk: The Fiduciary Committee” (February 12, 2024); Colonial Surety: “Common Fiduciary Errors” (July 31, 2024).