Small Business 401(k) Blog

401(k) conflicts of interest misalign the interests of employers and 401(k) providers. While employers have a fiduciary responsibility to choose a 401(k) provider with “reasonable” administration fees and cost-efficient investments to make retirement as affordable as possible for plan participants, conflicted 401(k) providers have a financial incentive to push overpriced administration services and investments when lower-priced - but otherwise comparable - alternatives are available. How do conflicted 401(k) providers get away with it? Often by spinning a conflict as a benefit.

Cost matters a lot when saving for retirement. When paid from plan assets, 401(k) fees reduce the account returns of plan participants dollar-for-dollar. Over decades, these losses can cost a 401(k) account hundreds of thousands of dollars in lost compound interest. Given the stakes, employers have a fiduciary responsibility to pay only “reasonable” 401(k) fees from plan assets. When this responsibility is not met, business owners can be held personally responsible for restoring excessive fee payments.

Recently, I listened to an insightful interview of Jerry Schlichter by Rick Unser of the 401(k) Fridays Podcast. In 2006, Jerry was the first private attorney to file lawsuits alleging excessive fees in 401(k) and 403(b) plans. Since then, his firm - Schlichter Bogard & Denton - has won more than $600 million in settlements on behalf of plan participants. He’s also won the only two 401(k) fee cases ever heard by the U.S. Supreme Court - Tibble v. Edison and Hughes v. Northwestern University. I consider the Jerry Schlichter interview a must-listen for 401(k) plan fiduciaries.

Last week, the Supreme Court of the United States (SCOTUS) issued their highly-anticipated Hughes v. Northwestern University decision. In a unanimous opinion, the court reaffirmed – as articulated in Tibble v. Edison International – that 401(k) fiduciaries have an obligation under ERISA to continuously “monitor” their plan’s investment menu and to remove any imprudent investments timely. A lower court - the 7th U.S. Circuit Court of Appeals - had dismissed case in 2020, suggesting that 401(k) fiduciaries could shield themselves from claims of imprudent investment selection by offering a diverse investment menu. SCOTUS returned the case to the 7th Circuit for reconsideration.

401(k) plans must pass certain IRS-mandated nondiscrimination tests annually to confirm Highly-Compensated Employees (HCEs) do not disproportionately benefit and that no plan participant exceeded certain contribution limits. Often, these tests are completed as soon as possible following a year-end so correction and deduction deadlines are not missed. For calendar-based 401(k) plans, that means now.

401(k) plans are popular today because they offer generous tax benefits to employers and employees. However, to qualify for these benefits, 401(k) plans must complete a myriad of plan administration tasks each year. It’s ultimately up to employers to ensure each task is completed timely. Meeting this important fiduciary responsibility can seem overwhelming, but it doesn’t need to be. The key is hiring a 401(k) provider that’s willing and able to do three things - 1) summarize all required tasks, 2) complete the more difficult and time-consuming ones, and 3) provide straightforward guidance for the rest.