Every year, employees in some companies, enrolled in retirement plans, are surprised to find that the nest egg they were counting on for their later years is not as secure as they once believed.
Most retirement plans are managed properly, are well-diversified, and assume few risks. In the plans that have been mismanaged, employees learn too late that the administrators or trustees of their retirement plans may have used pension assets to make questionable loans or to speculate in higher-risk investments.
Employees are not the only ones who can suffer. Even for employers whose only offense is exercising bad judgment, mistakes can be costly. Whether they were ignorant of the law governing pensions, or they genuinely believed their actions were in the best interests of their plans, employers may be held liable financially for losses sustained by the plans. Because employers typically include retirement assets of their own in their company's pension plans, bad investments can hurt them as much as their employees.
In addition to investing prudently, pension plan administrators should consider a number of transactions prohibited by law. Among those are:
Avoiding a conflict of interest between the person making the investment decisions and the investment itself is one such transaction. The Employee Retirement Income Security Act (ERISA), which spells out what plan trustees can and cannot do with pension assets, makes it illegal for an employer acting as the trustee for a plan to make loans to "parties in interest." Among such parties are members of an employer's immediate family.
Trustees are also prohibited from investing an excessive proportion of a pension plan's assets in a single type of investment. This rule is intended to minimize the risk of large losses. It is important to be certain that plan assets are well-diversified.
Most pension plans are on solid ground. Violations are the exceptions, not the rule, and the vast majority of all private retirement plans are honestly managed.
Still, employees have been cautioned against becoming complacent when it comes to their retirement plans. Plans must regularly submit forms to the federal government disclosing how assets are being used.