Department of Labor to Investigate 401(k) and 403(b) Plans

Written by Fred Reish

The U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) has identified participant-directed plans as a 2026 enforcement priority. Technically, the DOL refers to those plans as “404(c) plans”.  That is because compliance with ERISA section 404(c) is how plan sponsors shift the responsibility for participant investment decisions onto the participants.

The reference to 404(c) includes 401(k) plans and private sector 403(b) plans.

What EBSA Is Focusing On

Under the heading of Retirement Asset Management, the EBSA explains:

This enforcement area focuses on protecting retirement income by ensuring fiduciaries select and monitor plan investments prudently. Poor investment choices, high fees, and conflicts of interest can reduce participants’ future retirement income.

In describing this National Enforcement Project, the EBSA further explains:

Because most participants rely on 404(c) plans for their retirement savings, EBSA reviews whether fiduciaries follow a reasonable process when choosing and overseeing the plan’s investment lineup. Issues with these processes may be common, especially in midsize plans that may lack the resources of larger plans. EBSA evaluates these practices under the 404(c) regulation and recent Court decisions.

As a practical matter, in implementing the investigations the EBSA will review whether fiduciaries act prudently and avoid conflicts of interest when choosing investment options, monitoring performance, and managing fees and costs.

In its investigations, EBSA will examine whether plan fiduciaries:

• Follow a reasoned and well-documented process for selecting the plan’s investments.
• Regularly monitor performance, fees, and prudence of those investments.
• Remove or replace imprudent investments in a timely manner.
• Provide participants with the information needed under 404(c) to transfer investment responsibility to the participants. the plan’s investments.

Why This Matters—Especially for Midsize Plans

The EBSA indicated that, in its experience, midsize plans, and their sponsors and fiduciaries, may lack the resources to comply with the fiduciary rules and therefore have heightened risk. As a result, these plans often have fewer internal resources, rely more heavily on providers, and may lack formal fiduciary governance structures.

However, ERISA’s fiduciary standard requires decision-makers to act with the care, skill, prudence, and diligence of a knowledgeable person (sometimes called the “prudent expert rule”). A lack of internal expertise is not a defense; instead, it indicates that outside assistance may be required. Fortunately, the law says that, where fiduciaries lack the expertise to make knowledgeable and informed decisions about a matter, they can remedy the lack of expertise by engaging competent consultants and advisers.

What Plan Sponsors Should Do Now

To mitigate enforcement and litigation risk, fiduciaries should focus on their governance processes. The first step is working with an adviser who has experience with plans of your type and size.  An experienced adviser can help plan sponsors:

1. Formalize investment oversight procedures by adopting or updating an investment policy statement (IPS) and ensuring it is followed.
2. Conduct regular, documented reviews of investment management, investment performance, fees, and share classes, supported by reports on those factors and documented in committee minutes.
3. Benchmark fees and services against market data to evaluate reasonableness. The failure to ensure that plan and service fees are reasonable is the top claim of fiduciary breach.
4. Engage qualified experts where needed, including investment advisers or managers. While court decisions and DOL guidance typically use the term “experts”, as a practical matter it means r experienced and competent advisers and consultants.

Bottom Line

Plan sponsors and fiduciaries who are working with a Prime adviser will already have these governance processes and documents.  However, in light of the EBSA focus on these issues, now is a good time to review these steps and the related documentation with your adviser.