Do You Know What You're Being Charged for Your 401(k)?
In the past five years, many employees' 401(k) plans have taken a hit along with the economy. So it would be expected that, especially during such times, employers would make sure that they choose 401(k) plans for their employees with options that maximize the returns on their investments, right? However, rather than ensuring the selection of a plan in which the fees and expenses charged to employees are minimized, some employers are instead simply choosing 401(k) plan advisors based on pre-existing relationships, incentives, and often just sheer indifference and then give the advisor carte blanche to select the employees' investment options. The problem is that plan/investment advisors are only selecting investment options because they are receiving kickbacks through revenue sharing from the mutual fund companies that have overly expensive funds that no reasonable - or honest - advisor would otherwise select for employees. The end result is that the plan advisors, and in some cases the employers as well, are receiving the benefits of the investments while the employees are stuck with the diminished returns of an investment portfolio with excessive fees and expenses.
As employees receive only the value in their personal 401(k) plan and not a defined salary like in some pensions, employers do not have the same incentive to monitor the costs that are paid by the employees for their investments. However, regardless of what other motivations exist, employers as plan sponsors still have a fiduciary duty to their employees to investigate the costs and fees associated with the 401(k) options offered to their employees. It is the employer's duty make sound judgments regarding whether a reasonable value is being received for what the employees are paying to be participants of the 401(k) plan, and if it is not a good value, then employer's should either select a different plan or negotiate for different fees.
Unfortunately though, many employers are not motivated to act with the necessary diligence simply because of their fiduciary duty to their employees. This has resulted in attorneys providing the stimulus with a flurry of recent litigation against employers, who employees allege have breached their fiduciary relationship by not doing the most basic investigation to make sure that the fees being charged were minimal or at least competitive.
Generally, the cases focused on common practices of (i) “revenue sharing” as a source of compensation for plan service providers, (ii) undisclosed participant fees, and (ii) using high-cost investments when lower-cost alternatives were available. Although current cases are generally aimed at large employers, similar cases are likely to be filed against smaller employers, who are less likely to spend the time to negotiate reasonable fees. Consequently, fees paid by smaller plans, especially those holding insurance-based products, have significantly higher fees.
As part of a recent settlement, one company agreed to do things that it was expected to have been doing from the beginning. These things included:
1. Limit fees charged to participants;
2. Not allow investment consultants to also serve as investment managers;
3. Not allow investment consultants to receive compensation from plan investments;
4. Increase its communications with employees about investment options and fees;
5. Have an independent trust company monitor the plans;
6. Not include retail mutual funds (which are unnecessarily more expensive than institutional mutual funds) as investment options;
7. Undertake competitive billing for all services as contracts come up for renewal.
The fact that a lawsuit had to be initiated to make an employer follow such intuitive and basic principles is bewildering. However, this specific employer is certainly not alone. Therefore, perhaps it's time that you investigate the fees and expenses being charged on your 401(k) to see if your employer has provided you with reasonable investment options. If you find that you have retail mutual funds or insurance funds or otherwise find that you are being charged excessive fees and expenses for "actively-managed funds", then its time to contact an attorney to investigate whether your employer has breach its fiduciary duty to you. Contact the PBM attorneys for a free consultation.