IFA Radio's Episode 29

IFA Radio
Thursday, July 15, 2010

Click here to see a checklist for your Plan Sponsor.

 

Is Your Company Vulnerable to a 401(k) Lawsuit?

Plan Sponsor Questionnaire Can Save You Litigation

 
More and more corporations face litigations brought on by their employees concerning the management and responsibility for 401(k) and 403(b) plans. Picking up the list of recent lawsuits, you’d be hard-pressed to miss the number of occasions where the liabilities have fallen back to the plan sponsors after expensive litigations to prove the responsibility delegated to the plan providers was insufficient. 
 
Financial service providers, especially brokers and insurance companies have successfully evaded responsibility by claiming that they merely recommended securities, rather than accepting responsibility for selecting the investments that make up the options for a corporation’s 401(k) plan. What’s the difference between recommending and selecting? The two seem semantically identical, don’t they? Not so, and not understanding the difference creates enormous personal liability for plan trustees—including human resources administrators. Watch your step because you may be paying for advice without reaping the rewards of return—all while you retain liability you thought you had offloaded to your service provider.
 
The reason why plan sponsors are unaware of the liabilities still falling under their umbrella could be as simple as being misled by providers. Placed into the tight situation of offering 401(k) plans to their employees, plan sponsors place much unwarranted trust in the corporations providing the plans. 
 
This is how plan sponsors save themselves. First, the questions in the checklist provided as a link on this page give plan sponsors the arsenal required to strip down the convoluted wall constructed by plan providers and delve into the nit-gritty stuff of the services and fees rendered to the sponsors and participants. And if you’re unsure of whether or not you’re a plan sponsor, a simple question will fix the dilemma, “Did you sign something?”
 
The point of a 401(k) plan is that the plan sponsors and, ultimately, plan providers are required to act in the best interest of their clients. Does this happen? Yes, and no. When you ensure that your plan provider is an ERISA 3(38) Fiduciary, the provider will aid in establishing a healthy retirement fund for all clients or be held liable. However, if this seemingly minor detail falls under the radar, the plan sponsor can be held fully liable for the health of the employee’s plans. The truly shocking part of the 401(k) discussion, as mentioned earlier, can be witnessed by the number and sheer size of companies —especially, the giants of Wal-mart and Caterpillar to name two—brought to court pertaining to abysmal 401(k) plans and the exceedingly large amount of money litigated from these lawsuits. As pension plans fast become a concept of the past, 401(k) plans will be relied on to fund the future. 
 
The future of 401(k) s is bright, yet few plan sponsors are conscious of the improper practices that befall current plan fiduciaries. The following examples list significant examples of how plan providers fail their clients:
 
  • declining to account for revenue sharing—fees paid for recommending specific funds, commonly 12b-1 fees
  • providing investment options in actively managed mutual funds rather than passively managed index funds – actively managed funds carry expense ratios as much as 5 TIMES those of passively managed funds (index funds), but fail to offer higher expected returns and frequently carry more risk than index funds
  • failing to monitor similar 401(k) plans for competitive expense ratio structures
  • requiring the plan to pay retail investment management and administrative fees without compensating for increased prices with better retail services. Altogether, plan sponsors are continually scammed due to the ignorance of the corporations offering 401(k) plans to their employees. 
 
To fix this problem, questions must be asked, providers must be prodded, and reasonable compensation for fees rendered must persist. As a new rock is turned over in the 401(k) division, the plan participants have the initiative to ensure their retirement funds are properly managed and plan sponsors have a responsibility to hold their providers accountable. The key to 401(k) plans is to simply establish the fees and agreements of the plans in writing. In spite of everything, plan sponsors and participants can save the sweat and bubble bursts by turning the power off at the source: requiring the provider to be in writing an ERISA 3(38) Fiduciary. 
 
Surely your company doesn’t have $16 million lying around waiting to settle that 401(k) litigation…or maybe you do. Nowadays, a large sum of cash seems to settle all matters.

 

Click here to see A Letter for Your Plan Sponsor.

Login