401k-related lawsuits are everywhere lately, and the number is trending up! What’s the near omnipresent issue in all these suits? High cost. Most have been settled out of court to avoid the bad publicity because the stakes are so high. The Merrill's, Morgan's, Fidelity's and John Hancock's of the world are siphoning millions and millions of fee dollars from participant accounts—all at risk if the general public should finally learn the truth about the magnitude of these largely hidden costs. For plan sponsors, the financial hit may be proportionately less; but for them, the complete loss of employee credibility may be an even greater cost.
The reason ERISA exists is to protect investors from abuse, and it clearly lays out the responsibility of a plan fiduciary. Many plan sponsors have been led to believe their responsibility can be delegated or transferred to outside entities. If you take the time to read over the body of cases, you might be surprised to see how quickly and effectively all the so-called co-fiduciaries shirk any responsibility!
More recent regulations on fee disclosure (408b primarily) take more precise aim on the fees in 401k plans (some hidden, some in plain sight). Consumer advocates hoped these required disclosures would result in the sudden recognition that plan participants are being over-charged. No such recognition has occurred. Not because plan sponsors and participants are oblivious, but because the "providers" continue to obfuscate cost to preserve their own existence. And their existence is truly at stake, so their effort is understandably obsessive.
The 401k-plan world is dominated by actively-managed fund families and the commissioned salesmen who sell them. They defend their service in spite of average participation levels of about 60% and persistently poor (if not disastrous) investment decisions by participants. They produce "benchmark" studies that compare every over-priced plan to a universe of over-priced plans, and then declare your costs to be reasonable! So far, it seems to be working well for them. The movement away from actively managed funds and high add-on fees is barely noticeable.
Amazingly, the very plan aspects being challenged, litigated and settled in favor of participants in these lawsuits are present in virtually every plan we see! Many plans are much worse—they’re just lucky enough to remain unchallenged.
Stay tuned for our next blog about the surefire way to AVOID cost-related 401k lawsuits!
And in the meantime, check out our "Essential 401k Whitepaper" to get the scoop on why most 401k plans are not successful 401k plans!