You may have seen the headlines – 401k lawsuits are on the rise because Americans are retiring with less in their retirement accounts than they should have and employees are choosing to do something about it. Now, a landmark Supreme Court ruling has ensured that justice will be served in the 401k space instead of allowing these cases to be dismissed by courts.
The Floodgates Have Opened
In May of 2015, Tibble vs. Edison International made history as the first ever 401k case heard by the U.S. Supreme court. The results? The Supreme Court ruled in favor of the participants in Edison International’s 401(k) plan, who claimed company fiduciaries violated their duty to monitor three retail-class mutual funds. Edison’s employees felt their investment options were too expensive. The U.S. Supreme Court agreed and, thus, precedent was set.
Following the Money
Can you guess what Boeing, Lockheed Martin, Nationwide, and Novant Health all have in common? They’ve all been sued and paid out settlements for mismanaging their company’s 401k plan within the last three years. These settlements range from $32-140 million – and lawyers know a good thing when they see one. Where’s there are multimillion dollar settlements, there will always be legal teams eager to capitalize. It’s only a matter of time before these lawsuits trickle down to smaller companies as more and more legal teams take on these cases. With regulators slow to move, litigation will continue to shape the 401k space.
A Broken System
The administration of a company 401k plan often unfairly falls on one or a couple of individuals, called the plan sponsor or sponsors. These employees often have a myriad of other human resource obligations, leading them to delegate the responsibilities of 401k plans to banks and insurance companies.
Often, the banks’ and insurance companies’ part in the process is the source of much of the litigation, including high fees, conflict of interest, commissions, revenue sharing, and proprietary funds. However, it’s the plan sponsor’s responsibility to perform due diligence when selecting providers and to monitor them after plan implementation.
This means even if the big banks provides a bad plan, the burden to avoid or fix the bad plan ultimately falls on the plan sponsor. In other words, it’s up to the plan sponsor (who’s rarely a financial expert) to make sure the financial experts are providing a fair financial plan. If the plan is not fair, the plan sponsor and, by extension, their company will be held liable.
Does a Problem Really Exist?
The short answer? Yes. Fidelity, the financial company with the largest amount of retirement assets ($1trillion) under management has been sued by their employees for mismanaging its own 401k, twice.
Fees Matter
The Department of Labor has stated that for every 1% in fees in a 401k plan, employees retire with 28% less in their accounts. For some perspective, if you are set to retire with $250,000, and overpaid investment fees by 1%, you could have retired with $350,000. That’s a big deal!
In conjunction with the debilitating investment effects of high fees, fees are also the easiest target for lawyers. At this point in the process there is no industry standard for what is too high when it comes to 401k investment fees. However, at the same time, fees are quantifiable and often accessible through publicly available tax filings. When there’s smoke, there’s fire and high fees are typically the leading indicator that a plan is littered with other issues. Legal teams will take the lowest hanging fruit first.
Litigation is Employees’ Only Recourse
401k plans are excellent savings tools, especially when companies match contributions. However, as companies transitioned from pension plans to 401k plans, the burden for saving enough for retirement shifted entirely to the employee. This means employees’ only say in how they save for their future is the choice of 20 or so investment funds on the menu. If the choices are bad and employees find themselves in a situation where they will retire with less, what can they do? All too often, the only thing visible option is to sue their employer.
Looking for more information about your company’s 401k plan? Contact us at (719) 559-1919 or 401k@arkfi.com for a complimentary fee assessment to determine your plan’s level of risk.
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