Mismanagement of funds in 401(k) plans doesn’t happen often, but when it does, it’s usually not a mistake.

The Department of Labor recently settled two cases against employers who violated provisions of the Employee Retirement Income Security Act by not remitting elective deferrals into employee retirement accounts. Instead that money was comingled in the companies’ general funds and used for other purposes.

“On the mismanagement of the money side, I don’t see a ton of litigation because more companies are using third-party administrators, so they don’t touch the money,” says Iris Tilley, a partner with Barran Liebman LLC, a labor and benefits law firm in Oregon. 

Also see:DOL to issue proposal to help states avoid ERISA.”

She adds that companies that do in-house payroll treat it very similarly. When paychecks are cut, they typically submit employee 401(k) contributions to the plan provider at the same time.

“It is a bizarre scenario that [employers] would have money that was supposed to go to the 401(k) sitting in their general assets and being used, which is what happened in these scenarios,” Tilley says. “What I do see are minor errors. Someone forgets to make a 401(k) contribution so it goes in a month or two late. These mismanagement cases, to me, particularly border on an active purposeful mismanagement as opposed to individual error. Over the course of time it was not that someone forgot to do it. They made the decision to use it for something else.”

To help avoid this type of litigation, Tilley recommends that plan sponsors follow these three rules:

  • Never look at elective deferrals as if they are the company’s money. Elective deferrals come directly from a participant’s paycheck and are amounts they specified to go into their retirement plan. This money should never be placed into general assets. A company should never use these funds to pay bills, no matter if the company is in financial straits. “They are untouchable,” Tilley says. “They don’t belong to the employer.”
  • Remit the payments as soon as possible. “The longer payments like that sit in employer assets, the easier it is to get mixed up and comingled into the employer’s general assets,” she says.
  • Make sure you regularly reconcile employee elective deferral forms with the company payroll system. If employees increase the amount of money they are deferring into the 401(k) plan, that change needs to be processed as quickly as possible, advises Tilley.

Employers need to get employee deferrals into the plan no later than the 15th of the month after the declaration was made. For small employers, as long as they submit elective deferrals within seven days of the most recent paycheck, they are safe.

Also see:SCOTUS decision opens door to more 401(k) lawsuits.”

“It is actually pretty straightforward. It is not your money and send it to the 401(k) provider,” Tilley says.

Case details

In August 2015, the DOL’s Employee Benefit Security Administration filed a complaint against Steven J. Watkins, Oxford Holdings Inc., and Aetna 401(k) Plan alleging that the retirement plan was for the benefit of the employees of Oxford Holdings, a Fort Lauderdale, Fla.-based construction company.

The EBSA found during its investigation that from April 12, 2010, through April 5, 2013, Oxford and Watkins withheld $117,167 in employee contributions, failing to segregate them from company assets as soon as they could. The defendants never forwarded these contributions to the retirement plan.

The company went out of business in April 2013 and the defendants also failed to terminate the plan and ensure the plan’s assets, totaling $130,525 were appropriately distributed to plan participants. Since the complaint was filed, the defendants have made restitution to the plan in the amount of $95,000.

On Oct. 19, the judge issued a consent order permanently barring the defendants from acting as fiduciaries, trustees, agents or representatives in any capacity to any employee benefit plan, as defined by ERISA. They were also ordered to pay back $35,525 to the plan, which includes interest or lost opportunity costs that occurred as a result of their breaches of fiduciary obligations through Sept. 30, 2015. Interest will continue to accrue until the full amount is paid back.

Also see: “DOL primed to expand 401(k) oversight with Tibble v. Edison.”

In the second case, the Department of Labor went after a Pennsylvania dentist for misappropriation of funds that were intended for the dental office 401(k) plan. According to the DOL, the 401(k) plan trustees failed to get employee and employer contributions into the plan in a timely fashion from 2009 through 2012. 

On Oct. 5, the district court judge ordered that Lisa A. Ferrari, DMD, Clifton Casey and the company repay nearly $45,000, including lost interest, to plan participants. That includes $19,771 in plan assets, representing missing employee contributions, $17,480 in missing employer contributions, and interest in the amount of $7,735.

The defendants must repay the money in installments over the next 22 months. The money will go first to restore missing employer contributions and associated lost earnings. After those have been restored, the defendants must replace all missing employee contributions and associated lost earnings.

Also see: “Small retirement plan market ‘overlooked’.”

Once the debt is repaid, the defendants will be assessed a penalty in the amount of 20% of the applicable recovery amount.

Paula Aven Gladych is a freelance writer based in Denver.

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