Are the losses in your 401(k) plan due to poor investment performance or high administrative fees? Or both? Could either have been avoided? And whose responsibility was it to oversee those issues?
Retirement plans are governed by obscure law, are complex in nature, and include complicated investment products. Participants rarely understand their 401(k) plans or the investment options presented to them. The Employee Retirement Income Security Act (“ERISA”) provides participants with the right to take action against irresponsible plan fiduciaries, but what good is that when it is nearly impossible to know if a plan is being run well?
In short, employees simply do not know if they are getting a good deal or a bad one with their 401(k).
Millions of Americans choose to save for retirement by participating in their employer’s 401(k) plan. According to the Plan Sponsor Council of America, 86.3% of employees eligible to participate in their employer’s profit sharing or 401(k) plan have an account balance. However, participants, generally employees who are not experts in investment management or plan administration, do not have a reasonable way to assess the quality of their 401(k) plan or the investment options presented to them.
The individuals responsible for a 401(k) plan’s oversight are the plan’s fiduciaries. I have previously discussed some specific fiduciary issues regarding 401(k) plans for small businesses. Plan fiduciaries are responsible for the responsible administration of the plan, including the selection of prudent investment options and monitoring the administrative fees paid by the plan. ERISA creates accountability for fiduciaries who breach their duties, but this system only works if participants take an active role in monitoring the quality of their 401(k) plans and show a willingness to take action if there is a problem. Businesses cannot change whether or not they have this fiduciary duty, but they can certainly affect how educated they are about their duties.
Recent failures by fiduciaries to meet the standards in ERISA have received both media and judicial recognition. The Western District of Missouri handed down a $35 million verdict on March 31, 2012 in Tussey v. ABB, Inc., a fiduciary breach case focused on excessive administrative fees and the failure to select the lowest cost share class available to participants.
The problems with 401(k) plans can be addressed. Bad investment options can be replaced by good ones. Administrative fees can be lowered. But this can only happen if participants are willing to take action by asking hard questions and contacting qualified counsel.