Is Your Company’s 401k Plan as Good as It Could Be?

In light of a recent SCOTUS ruling, this is a good time to double-check.

How often do plan sponsors check up on their 401k? Not as often as they should, perhaps. A recent legal development seems to call for greater supervision of these plans from employers – a degree of supervision many have not routinely provided.

A major lawsuit has been resolved concerning investment selection & fees. The Supreme Court decided Tibble v. Edison International, No. 13-550. It ruled that under ERISA, a plaintiff may timely initiate a claim for violation of fiduciary duty by a plan sponsor within six years of the breach of an ongoing duty of prudence in investment selection.1

Specifically, some beneficiaries of the Edison 401k Savings Plan took Edison International to court, seeking damages for losses and equitable relief. Twice, the plaintiffs argued, the plan sponsor had added higher-priced funds to the plan’s investment selection when near-identical, lower-priced equivalents were available.1

Justice Stephen Breyer, stating the opinion of the unanimous Court, wrote that retirement plan fiduciaries have a “continuing duty — separate and apart from the duty to exercise prudence in selecting investments at the outset — to monitor, and remove imprudent, trust investments.”1,2

Do you see more lawsuits emerging as a consequence of this ruling? It does seem to invite them. The above language implies that the investment committee created by a plan sponsor shoulders nearly as much responsibility for monitoring investments and fees as a third-party adviser. Most small businesses are not prepared to benchmark processes and continuously look for and reject unacceptable investments.

Do you have high-quality investment choices in your plan? While larger plan sponsors have more “pull” with plan providers, this does not relegate a small company sponsoring a 401k to a substandard investment selection. Employees are smart and will ask questions sooner or later.

Are your plan’s investment fees reasonable? Employees can deduce this without checking up on the Form 5500 you file – there are websites that offer some general information as to what is and what is not acceptable. Most retirement savers read up on this.

Are you using institutional share classes in your 401k? This was the key issue brought to light by the miffed plan participants in the Tibble v. Edison International case. When Edison International added a collection of mutual funds to its 401k plan in 1999, it chose to offer plan participants retail shares in six of those funds rather than institutional shares.3

Edison International saved about $8 million in administrative expenses with that move – but there was a cost for that savings, and it was passed on to plan participants. They ended up paying higher fees on those investments, for retail shares have markedly higher fees than institutional shares. It is not unusual for the difference to exceed a tenth of a percent. This may not seem like much to quibble about in the present, but the impact on retirement savings over time can be significant.3

When was the last time you reviewed your 401k fund selection & share class? Was it a few years ago? Has it been longer than that? Why not review this today? It is part of your fiduciary duty to your employees to do so. Click here to get started.

Citations.
1 – faegrebd.com/23003 [5/18/15]
2 – ebn.benefitnews.com/news/retirement/scotus-decision-opens-door-to-more-401k-lawsuits-2746418-1.html [5/18/15]
3 – money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2014/03/31/how-the-supreme-court-could-stop-the-401-k-rip-off [3/31/14]

This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund, Mark is known as The 401k Advisor, Investor Coach, The Financial Advisor, The Financial Planner and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisor firm providing 401k consulting for small businesses and financial Advisor services for professional athletes and individuals. Stonecreek is located in Salt Lake City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, and American Fork City in Utah.

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