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401k Court Cases Wake Up Call for Plan Sponsors

401k Court Case

401k Court Cases Wake Up Call for Plan Sponsors by Steff Chalk

401k court cases have been noticed by many plan sponsors over recent years.  It is less expensive for a plan fiduciary to be aware of plan requirements than to argue the facts during a 401k court case. Growing numbers of plan sponsors are facing 401k fiduciary court cases where the plan fiduciary’s actions have been called into question.  The question the courts are grappling with is whether fiduciaries have sufficiently fulfilled their fiduciary duty to the plan or its participants. The outcomes of 401k court cases have been mixed, but a decent number of the rulings have come out in favor of the plaintiffs, who are usually a participant or group of participants who have brought a case against the plan sponsor. Many of these 401k court cases have focused on absolute fees, the reasonableness of fees and the necessity of specific fees. Do the fees and services that are being assessed add value? Does the help participants receive, help them to achieve their retirement goals?

The headline of a recent article in the Valdosta Daily Times, a local newspaper in Georgia, asked the all-important question: “How’s your 401(k) plan?” The author, Kent Patrick of financial advisory firm Bush Wealth Management, aptly points out that it’s a question plan sponsors don’t ask enough. Moreover, he asks: Is your 401k plan as good as it could be? That’s a heady question. Let’s step back and start with: How often do you check up on your retirement plan and fees? Most experts agree at least annually is ideal.

Mr. Patrick points to two landmark rulings from the historic Tibble v. Edison International 401k court case.  One was from the Supreme Court in 2015; the other from the U.S. District Court for the Central District of California in 2017. You can read the details of the cases in the article linked above, but basically, the outcome was that Edison International, the plan sponsor, had committed a breach of fiduciary duty by selecting higher-priced mutual funds for its investment menu when equivalent, lower-cost ones were available. In addition, the Supreme Court ruled that, under the Employee Retirement Income Security Act (ERISA), the law that governs retirement plans, a plaintiff can initiate a claim for violation of fiduciary duty by a plan sponsor “within six years of the breach of an ongoing duty of prudence in investment selection.”

Investment committees need to be aware of their fiduciary duties and remain vigilant in carrying out duties. Investment and retirement plan committees have as much fiduciary responsibility for selecting plan investments and monitoring their fees like every other fiduciary.  Benchmarking investments and monitoring costs is time-consuming. However, so is dealing with 401k court cases when participants sue for a breach of those duties.

Is your retirement plan using institutional share classes in your investment lineup? Why does this matter?  In Tibble v. Edison, it was found that the investment committee selected retail shares rather than institutional shares. Institutional shares typically cost less than retail shares. It may only be a few basis points, but those seemingly small differences make a huge impact when it comes to your participants’ ability to build wealth for retirement over time. The lower the fees they pay today, the more of their savings they can put to work for their future.

If it’s been a while since you’ve undertaken any benchmarking exercises, now, is as good a time as any to assemble your retirement plan committee to review the plan’s investment lineup and fees.   Make sure the fees are reasonable and necessary, and that participants’ best interests are represented first and foremost. Your employees rely on their workplace retirement plan to help them build wealth and financial security for their future. As a plan fiduciary, it’s your responsibility to help them achieve those goals. Taking some time to evaluate the plan’s investment menu and fees, and adjust fees as necessary. It is the best way to avoid 401k court cases, and help your participants live well in retirement.

Steff Chalk

Steff Chalk

Managing Editor at 401kTV
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.
Steff Chalk

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