401(k) Plan Lawsuits Focus on Reasonable Fees and Trustee Responsibilities
According to a Wall Street Journal article, there are several high-profile lawsuits pending right now against companies for the way they manage their participant-directed individual account plans (e.g., 401(k)s and 403(b)s). These lawsuits allege that the organizations (as plan sponsors and trustees) failed to act in the best interest of their employees by:
- Using high-cost retail mutual funds over lower-cost options
- Allowing excessive recordkeeping fees being charged to the plans instead of the plan sponsor
- Agreeing to use only proprietary investment options from the recordkeeper (which in turn reduced other fees paid by the employer)
- Funneling employees’ savings into investment products managed by affiliated companies
Plan trustees are responsible for fees
Greater scrutiny of costs and fees began at about the same time the Department of Labor issued its fee disclosure regulations in 2012. These regulations mandated that service providers, whose fees are paid from the assets of a retirement plan, disclose their fees and any revenue sharing arrangements to the plan trustees. These service providers may include record keepers, investment advisors, accountants, or lawyers. Under those same rules, plan trustees are now held accountable to determine if the fees paid from plan assets are “reasonable.” Failure to make that determination or to approve fees that are later determined to be “unreasonable” will result in a “prohibited transaction,” subjecting the plan to excise taxes. Also, the amounts of the fees that are determined to be excessive have to be restored to the plan, most often by the plan sponsor.
Develop a process and document key decisions
So, how do plan sponsors and trustees comply with these regulations? Having a good process and adequate documentation of the process is key. Prepare minutes or memos on any key decision made concerning the retirement plan, the engagement of service providers for the plan, and the regular monitoring of the plan. Also, having a benchmark report prepared for your retirement plan every two or three years is another good idea.
Download a sample of our complimentary Retirement Plan Diagnostic Report, which is designed to address your fiduciary responsibilities and give you a benchmark for how your fees stack up to other plans. Retirement Plan Diagnostic Report
Whenever possible, try to get the lowest cost share class for the investments offered in the plan. Stay away from vendors that mandate their investments be used as part of the plan’s investment line-up. An ideal plan uses an “open architecture” recordkeeping platform, which allows retirement plan advisors and sponsors to select from a practically unlimited array of investments.
How we can help
Our May 19, 2015, webinar offered an opportunity to learn more about these pending lawsuits and plan sponsors’ obligations under the Department of Labor’s fee disclosure regulations. This educational presentation provided practical solutions for managing your retirement plan in a compliant manner.
CliftonLarsonAllen (CLA) also offers three complimentary tools to help you comply with the retirement plan fee disclosure rules and examine the effectiveness of your plan. Our Plan Check-Up looks at the current plan design to see if it is accomplishing your goals. The Retirement Plan Diagnostic Report addresses your fiduciary responsibilities and gives you a benchmark for how your fees stack up to other plans. If your fees look high, we can run a Retirement Plan Efficiency Analysis (RPEA) to illustrate how an alternate recordkeeping and investment platform could reduce fees while maintaining or improving the plan’s benefits and features.