Many employers provide 401(k) plans and other retirement benefits to their employees for a variety of reasons from altruistic, to pure competitive necessity. What these
employers don’t realize is that the moment they set up a Plan, they’re no longer just an employer. They are a Plan Sponsor, and in the eyes of the Federal Government – a “fiduciary”.
Under ERISA, fiduciaries may be held responsible for the mismanagement of employee benefit plans. Even if an employer outsources the management of their plan to a financial institution, the fiduciary responsibility remains with the employer (Plan Sponsor). Check out the fine print in your Services agreement and you’ll see that you, NOT the 401(k) administrator, is responsible for breaches of fiduciary duty.
In 2014 a wave of lawsuits was brought against Fortune 500 firms such as Intel, Verizon
and Chevron for mismanagement of their 401(k) plans due to payment of “excessive” management fees to the fund managers of their respective 401(k) plans. Settlements of these suits have totaled in the 10’s of millions of dollars. In response, sponsors of these billion dollar plans have worked to reduce management fees and closely monitor all aspects of their benefit programs.
Now plaintiff firms are targeting small employers for the following reasons:
- It is easy to identify and argue fees that may be above market are “excessive management fees”
- Smaller Plans (under $25M in asset value) typically carry higher fees because they lack the size to negotiate lower fees
- In some cases 401(k) plans with less than $1M in assets pay 5 times the management fee rate of the Billion dollar plans
- Small employers (Plan Sponsors) either don’t have the time or are simply not aware of their responsibility to periodically check the fees charged by their plans.
It’s hard to argue the lawyers’ challenge: that people who work for small companies shouldn’t be punished with exorbitant expenses just because they work for a small employer. Unfortunately, it’s the employer, not the Wall Street fund manager, who’s left holding the bag for hundreds of thousands of dollars in legal fees and settlements.
The solution is simple. Employers need to add a Fiduciary Liability policy to their business portfolio. The cost for most policies is nominal, and many are available with NO deductible. If you’re not sure about Fiduciary Liability – ask your accountant, or better yet, your 401(k) advisor and they’ll agree that Fiduciary Liability is a “no brainer”.