Are 401(k) plans dangerous for business owners?

By Nick Paleveda MBA J.D. LL.M

National Pension Partners


In two recent cases Santommenov v. John Hancock Life 11-2520 (3d Circuit 2012) and Tussey v. ABB No. 2:06-CV 04305 W.D. Mo.(2012), the Third Circuit Court of Appeals and the Federal District Court of Appeals for the Western District of Missouri both handed down decisions that are cause for concern if you are a business owner. In Tussey, the judgment was for $35.2 million as the plan sponsor had Fidelity funds and not Vanguard funds and did not negotiate recordkeeping fees, etc.

In Santommenov, an annuity was sold to a 401(k) plan and the employees complained about "excessive fees." The case was dismissed under the ICA but allowed to continue under ERISA.

Perhaps plan sponsors should look at defined benefit plans like 412(e)(3) where the employees do not have endless litigation opportunities. For example, see Fischer v. Penn Traffic, where the Second Circuit Court of Appeals dismissed the complaint of employees against a defined benefit plan for lack of standing. The court said defined benefit contributions are company funds not employee funds.