Individuals who plan to borrow from an employer-sponsored retirement account or plan to use a third-party administrator to oversee employee retirement accounts should not underestimate the importance of doing due diligence. Rules and laws are in place to prevent the mismanagement of funds and improve transparency to protect account owners.

However, the threat of prosecution and fines is not always enough to keep some retirement plan administrators from resorting to unethical tactics for personal gain.

Mismanaged funds

One advantage of employer-sponsored retirement accounts is the account holders can lend themselves a portion of their retirement funds. While this can be helpful, it could become problematic if third-party administrators abuse their duties and mismanage funds. One common method of doing so is encouraging account holders to borrow from the retirement administrator's general funds using their retirement assets as collateral.

Class action litigation

Some borrowers who are savvy to the workings of these accounts may be able to avoid mismanagement by carefully reviewing their retirement plan sponsor's loan terms and making adjustments/revisions as necessary. However, many others are not as knowledgeable about how such plans work. The law allows injured parties to file grievances, and when there are similar grievances against the same defendant, those individual grievances may meet the criteria for a class-action lawsuit. Investor fraud charges may also apply.

Employers can become defendants in a class-action lawsuit. They are still liable for the actions of third-party administrators even if they are also seeking to hold the retirement account administrator accountable and to recoup any losses.