Mitigating Common Risk Management Pitfalls

Five Common Retirement Plan Risk Management Pitfalls

Retirement plan sponsors operate in a high-stakes regulatory landscape under the Employee Retirement Income Security Act of 1974 (ERISA). Over the past decade, ERISA litigation has surged — often catching even well-intentioned fiduciaries off guard. To mitigate risk and protect both the plan and its participants, it’s critical to understand where litigation most often originates:

• Excessive fees. A primary driver of ERISA lawsuits involves claims that investment and administrative fees are unreasonably high. Plaintiffs argue that plan fiduciaries failed to leverage their bargaining power or benchmark fees against comparable options. Regular fee reviews and robust vendor management can go a long way toward reducing this risk.
• Poor investment selection or monitoring. Courts have scrutinized fiduciaries who retain underperforming funds or fail to provide a diverse menu of options. Sponsors should have clear investment policies in place and document decision-making processes to show prudent oversight.
• Self-dealing and conflicts of interest. When fiduciaries act in their own interest — or appear to — it can trigger major legal exposure. Ensuring transparency, eliminating conflicts and following a documented process for all plan-related decisions help reinforce fiduciary integrity.
• Cybersecurity and data breaches. Though relatively newer, claims related to participant data theft or unauthorized distributions are gaining attention. Plan sponsors are expected to select and monitor service providers for their cybersecurity protocols and to educate participants on safe online practices.
• Misuse or mishandling of forfeitures. Litigation is increasingly targeting how forfeitures — unvested amounts from terminated participants — are managed. Failing to use forfeitures in line with plan documents or allowing them to accumulate indefinitely can raise fiduciary concerns. Sponsors must review plan provisions and apply forfeitures in a timely, compliant manner.

Plan Sponsor Best Practices

Here are key best practices to help you mitigate litigation risks:

• Maintain a well-documented fiduciary process that emphasizes prudent, reasoned decisions
• Regularly benchmark fees and services
• Provide ongoing fiduciary training for committee members
• Conduct annual plan governance reviews to identify gaps
• Monitor cybersecurity policies of service providers and keep participant education current
• Review and track forfeiture usage to ensure alignment with plan terms and compliance expectations.