Is Your 401(k) Plan a Potential Litigation Target?

In a recent article on NAPA Net, Nevin E. Adams, JD, Chief of Marketing & Communications for the American Retirement Association, outlines six (6) areas of concern for plan sponsors of 401(k) plans. We have listed these areas of concern below and added our commentary.

1. Does your plan have multi-billion dollars of plan assets? Litigators are “fishing for the big fish” to increase their potential recovery. Our clients do not have plans of this size, but other areas of concern outlined below are certainly more relevant.
2. Does your plan utilize “retail class” mutual funds?  The same mutual fund may come in multiple packages from retail class to institutional class and iterations in between.  The issue is that retail class mutual fund shares have higher fees than institutional  class shares. Often, plans may be in a position to utilize lower-fee mutual fund share classes, but do not know it or are not so informed by their so-called advisors.
3. Does your plan menu include “proprietary” funds?  This can mean either that the plan sponsor is utilizing investment product produced by the plan sponsor entity, which, of course, has limited application. Of greater concern, and the subject of recent litigation, is the utilization of an expensive and/or poorly performing stable value fund product from the platform provider utilized by the plan. For example, a plan might use the XYZ Stable Value Fund when the plan is on the XYZ 401(k) platform. Recent cases have focused on either the below-market crediting rate of the stable value fund and/or the excessive undisclosed fees of the fund.
4. Do you benchmark plan fees and investments? It is important to have a process to regularly “benchmark” your fees and investments with plans of comparable size and demographics to determine if fees are reasonable and investments are performing up to par.
5. Are participants charged for recordkeeping services on a “percentage of assets” basis or as a per-participant fixed fee?  Many record-keepers continue to charge basis points, or a percentage of plan assets, for record-keeping services. This means that those with higher account balances pay more for these services when the required tasks and functionality are the same for both small accounts or large accounts.  In addition, as accounts grow, record-keeping becomes more expensive?   A trending best practice is to apply a fixed-fee, per-head, record-keeping charge rather than basis points.
6. Has your plan hired a qualified retirement plan advisor? A qualified advisor can assist with addressing all of the issues outlined above and also be available to both the plan sponsor and plan participants to offer advice. This can result in fiduciary protection to the plan sponsor and better outcomes for plan participants.

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Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as investment, tax or legal advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary.  Therefore, the information should be relied upon when coordinated with individual professional advice.