401k Plan Error Causes Fiduciary Lawsuit
401k plan errors can lead to costly lawsuits. Retirement plan fiduciaries need to be well versed in the plan terms and conditions in order to avoid 401k plan errors. Plan fiduciaries would be well served ask themselves: “How well do I know our plan document?” If you answered, “not that well,” you might want to consider cozying up with your plan document and getting to know its content inside and out — including the fine print.
It is time to make yourself aware of the big picture. Failing to follow the written terms of a retirement plan document is a breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA), the law that governs employer-sponsored retirement savings plans. ERISA requires fiduciaries to act “in accordance with the documents and instruments governing the plan,” if the documents are ERISA-compliant.
According to a recent post on the “E is for ERISA” blog, a human resources executive at Conagra Brands has been personally named as a defendant in a proposed class action lawsuit in the Northern District of Illinois, Karlson vs. Conagra Brands, Case No. 1:18-cv-8323, for allegedly failing to follow the terms of the company’s 401(k) plan document. Highlighting the 401k plan errors, the lead plaintiff is the company’s former senior director of global benefits. Other named defendants included the benefits administrative and appeals committee of the Conagra board. The VP of Human Resources named in the lawsuit was a member of both committees.
Typically, 401(k) plan errors which lead to lawsuits, pertain to fiduciary breaches related to the plan’s investments, such as too-high fees and revenue sharing. To reiterate, the Conagra lawsuit has to do with 401k plan errors in the form of a fiduciary breach for failing to follow the terms of the company’s retirement plan document. In this instance, Conagra’s plan document included bonus compensation received after separation of employment in its definition of compensation that was subject to salary deferrals and employer matching contributions. There were some specific provisions, including that the amounts be paid by the later of the date that is 2 1/2 months after the end of employment, or end of the year in which employment terminated. It gets even more complicated. From the “E is for ERISA” blog:
“Post-severance compensation was included in final regulations under Code § 415 released in April 2007 and is generally an option for employers to elect in their plan adoption agreements. Note that, when included under a plan, post-severance compensation never includes actual severance pay, only items paid within the applicable time period that would have been paid in the course of employment had employment not terminated.
Karlson was terminated April 1, 2016 and received a bonus check 3 ½ months later, on July 15, 2016, and noted that the Company did not apply his 15% deferral rate to the bonus check and did not make a matching contribution. Because the bonus check fell squarely within the definition of “compensation” subject to contributions under the plan, Karlson felt there was a 401k plan error, and filed an ERISA claim after exhausting his administrative remedies under the plan.
Further, the complaint alleges more than an administrative oversight on Conagra’s part. Conagra changed its interpretation of how post-termination bonus checks were treated, calling it an “administrative interpretation” of the terms of the Plan that was within its right as the Plan Administrator. Conagra claims their action did not require an amendment to the Plan. Karlson disagrees, claiming that the company’s “administrative interpretation” contradicts the Plan’s terms, and has pursued his case through the appeals process. Again, from “E is for ERISA”:
“Karlson alleged, in relevant part, that Conagra’s narrowed administrative interpretation coincided with a layoff of 30% of its workforce and was motivated by a desire to reduce its expenses and improve its financial performance. This, Karlson alleged, was a 401k plan error in the form of a breach of the fiduciary duty of loyalty to plan participants and the exclusive benefit rule. Hence, Mr. Karlson claims this 401k plan error violated ERISA.”
As of the writing of the blog post, the parties were awaiting a status hearing to discuss a potential settlement of Karlson’s claims. The blog’s author, an ERISA attorney, concurs that the timing of the layoff adds fuel to Karlson’s case and claims of a 401k plan error. And, operational errors relating to the definition of compensation are among the IRS’s “top ten” failures corrected in the Voluntary Compliance Program. The author is familiar with these types of 401k plan errors because she deals with them errors frequently in her own practice, she explains.
To limit these operational failures, the author recommends all plan sponsors, all personnel responsible for plan administrative functions (HR, payroll, benefits, etc.), and all providers (especially third-party payroll vendors) do a “table read” that reviews how compensation is defined in their plan adoption agreement and summary plan description. All interested parties should be present at the meeting in person or via conference call, and everyone should be on the same page when it comes to the items that are included in compensation for plan contribution purposes, and regarding procedures related to post-termination compensation. If the goal is to eliminate 401k plan errors, then plan sponsors should also consider consulting with a benefits attorney for additional help.