401(k) and ERISA Settlements Explained
When a 401(k) plan charges excessive fees or keeps poor investments, participants can bring a class action under ERISA. Here is how these settlements work and how you get paid.
401(k) and ERISA settlements resolve class actions claiming that the people running an employee benefit plan breached their legal duties, for example by letting the plan pay excessive fees or keeping underperforming investments. If you had money in the plan during the class period, you are usually included automatically, and your share is typically paid into your plan account or, if you have left, by a rollover or check.
What ERISA requires
The Employee Retirement Income Security Act of 1974 governs most private-sector retirement and health plans. It makes the people who manage a plan, called fiduciaries, responsible for acting solely in the interest of participants, with the care and skill of a prudent expert. ERISA lets participants sue on behalf of the plan when fiduciaries fall short.
Common claims in ERISA class actions
- ✓Excessive recordkeeping fees: paying more for administration than similar plans pay.
- ✓Expensive share classes: offering a higher-cost version of a fund when a cheaper version of the same fund was available.
- ✓Imprudent investments: keeping underperforming funds, including the company's own proprietary funds, without proper review.
- ✓Forfeiture use: using forfeited employer contributions to reduce the employer's own costs rather than plan expenses, a newer theory courts are still sorting out.
- ✓ESOP valuations: employee stock ownership plans that allegedly paid too much for company stock.
- ✓Health plan issues: surcharges, such as tobacco surcharges, or benefit denials that allegedly violated ERISA rules.
Who qualifies
The class is usually everyone who participated in the plan, or had a balance in it, during the class period. That includes former employees. Because the plan's recordkeeper has your account history, you generally do not need to prove anything. Beneficiaries and alternate payees, such as former spouses under a court order, are sometimes included too.
How you get paid
- ✓Current participants: your share is typically deposited into your plan account and invested according to your current elections.
- ✓Former participants: you may receive a check, or be given the option to roll the payment into an IRA or another retirement plan. Some settlements require former participants to submit a form to choose.
If you left the employer, the settlement may need a form from you to roll your payment into a retirement account. Without it, you may receive a check with taxes withheld. Read the notice and return any form before the deadline.
How much ERISA settlements pay
Shares are usually based on your average account balance during the class period, so people with larger balances receive more. After attorneys' fees and costs, the amount per person is often modest, but because it goes into a tax-advantaged account, it continues to grow with your retirement savings. Some settlements also require changes, such as fee reviews or new investment options, that benefit everyone in the plan going forward.
Taxes
Money deposited into your plan account or rolled into an IRA is generally treated like other retirement money, taxed when withdrawn. A direct check may be taxable and may come with withholding, and early withdrawal rules could apply. A tax professional can advise on your situation.
What to do
- 1Make a list of every employer whose 401(k), 403(b) or ESOP you participated in.
- 2Check whether any of those plans have open ERISA settlements on the settlement list.
- 3If you are a former participant, update your address and complete any rollover form.
- 4Keep your plan statements, which show your balances during the class period.
Why fees matter so much
A difference in fees that looks tiny in a single year compounds over decades of saving. That is why ERISA lawyers focus on recordkeeping costs and fund expenses. You can check your own plan's fees in the annual fee disclosure that plans must provide to participants. If they look high compared with similar plans, that does not mean a lawsuit will follow, but it is worth knowing.
If you have several old 401(k) accounts, consider keeping a simple list of each employer, the plan name and the years you participated. ERISA cases often cover class periods that reach back several years, and that list makes it easy to spot a match when a settlement opens.
Our guide to settlements for employees covers other workplace cases. Add your current and former employers to SettleScout, and it will flag matching retirement plan settlements and remind you if a form is due.
Frequently Asked Questions
Do I need to file a claim for a 401(k) settlement?
Usually not if you are a current participant, since payments go into your account automatically. Former participants sometimes need to submit a form to choose a rollover. Check the settlement notice.
I cashed out my 401(k). Can I still get paid?
Often yes, if you had a balance during the class period. Former participants are usually included and receive payment by check or rollover. Keep your address current with the administrator.
Does an ERISA lawsuit mean my retirement money is at risk?
Not usually. Most ERISA class actions are about fees and investment choices, not about money being missing. Plan assets are generally held in trust separate from the employer.
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