The 401(k) opportunity is one of the most powerful long-term investment vehicles any employer can offer its employees. Because employees want 401(k) plans, most employers recognize that they had better offer them if they want to at least be equal to the competition for job candidates. That is why so many employers do exactly that. The U.S. Department of Labor states that 638,390 defined contribution retirement plans exist today out of which, 513,000 are 401(k) plans. Nearly 90% of employers with 500 or more employees offer this benefit (summarized by the American Benefits Council)
Given the significance of the 401(k) plan, anything at all that degrades its value or undermines its effectiveness is reprehensible. The United States Supreme Court seems to agree. In a recently settled case between Edison International and its employees, Justice Stephen Breyer affirmed that employers have a duty to monitor 401(k) investment options to ensure that excessive fees do not accrue to the employees’ financial harm (Associated Press, The Kansas City Star, “Ruling Opens 401(k) Plans to More Suits” May 19, 2015, p. A7):
“The continuing duty to review investments includes a duty to remove imprudent investments.”
I am glad to see some legal limelight brought to bear on these kinds of situations for three reasons:
- Employees should not have to endure exorbitant fees to invest their hard-earned money. Even a fraction of a percentage point in higher fees can add up to tens of thousands of dollars over the lifetime of the average 401(k) account. There is no excuse for that kind of fiduciary mismanagement when we have so many reputable mutual fund companies that provide 401(k) custodian services for extremely minimal expense fees.
- Too many employers have been taken in by supposed “salespersons” who offer to provide 401(k) services when in actuality, they are selling expensive load funds, annuities, and even disguised insurance products with steep commissions. (When this happens, grab your wallet and run!)
- Employers and employees will become more informed about the right ways and the wrong ways to run a 401(k) program. Armed with that knowledge, they will both be able to evade the shark attacks.