Warning: Your 401k Plan May be a Lemon


Yale Professor warns of Hidden Excessive Fees

Yale Law School professor has put many 401k industry providers have been in an uproar over the last few weeks. Professor Ayers sent letters to about 6,000 sponsors of 401(k) plans suggesting that they may have breached their fiduciary duties with respect to plan costs and investments.

Many of the letters state that the sponsor’s plan has been identified as a “potentially high-cost plan,” and all of the letters we have reviewed suggest that the sponsors consider improving their fund lineup and eliminating more expensive fund offerings. The letters refer to a study prepared by the professor and a colleague based on data compiled from the Forms 5500 Tax Filing. It has been my experience that plan sponsors were not aware that their filing can be found on the efast.dol.gov page on Department of Labor’s website. They also used BrightScope.com and independent evaluator of 401k plans. They make sense of the long form 5500 data and then compare plans to pier groups.

401k Excessive Fee Lawsuits and 401k Fiduciary Breaches

Attorneys at the law firm of Drinker Biddle say that “Given the current focus on plan expenses by the DOL and in class action litigation, plan sponsors who received such a letter have a right to be concerned. But even those who did not need to be aware of this issue and take appropriate action.”

Fiduciary Liability and Plan Monitoring

None of this should come as a surprise. A year ago, the Department of Labor required providers to offer details of their fees to plan sponsors aka 408(b) 2. Subsequently participants were also provided with disclosures. It does not appear from the clamor that these disclosures disrupted the consciousness of employers. I believe that it is due to the fact that few have ever received the education that the Center for Fiduciary Studies provides. If you don’t know what you don’t know what to do, it is easy to think that you are doing what you are supposed to do. It appears too many that means hiring a benefits firm or a w well known national investment provider to handle it. The Department of Labor specifically says on their website and in publications that the company and its responsible parties (fiduciaries) are responsible for monitoring their picks.

Hidden Fees and Excessive Fee Law Suits

Googling Hidden Fees and Excessive Fee Law Suits will show that there are several well-known firms that have fallen prey to that assumption. The Drinker Biddle attorneys reiterate what the DOL says in their conclusions “what should a plan sponsor do?”

First step, benchmark your plan. The following show examples of a third party provider benchmarking of investments and fees.

The second step, based on negative findings, negotiate for reduced costs (which could include less expensive fund share classes or credits to an expense recapture account) or expanded the services.

Let us know if you have recently benchmarked your plan and what you found. If you haven’t, contact us to assess your risk and need for benchmarking.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI


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This entry was posted in 401k Fees, 401k Monitoring, 401k Review, Fee monitoring, Investment Monitoring, Investment selection and tagged , , , . Bookmark the permalink.

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