What’s the #1 Reason for 401k Lawsuits? Overpriced or Superfluous 401k Services
In my last blog, I wrote the key virtue of the DOL’s new fiduciary rule is that it aligns 401k plan sponsor and financial advisor interests. Once the rule is effective, all advisors will be obligated to act in the sole best interest of 401k participants just like 401k sponsors. Prior to the rule, some advisors could fleece 401k plans without consequences – which often left 401k sponsors personally liable for participant losses due to excessive advisor fees.
When writing this blog, I got to thinking about 401k fee lawsuits in general. They have been picking up steam for years now and I regularly talk to small business owners afraid of being targeted. I understand their concern. It seems trial lawyers are looking for any excuse to hold 401k fiduciaries personally liable for extraordinary plan fees – even excessive participant mailings!
So what’s my advice to small business owners worried about 401k fee lawsuits? Avoid overpriced or superfluous 401k services that unnecessarily reduce participant returns. It’s that simple. How do you that? I recommend a 2 step process.
Step 1 - Know your options before you start shopping for 401k services
I beat this drum a lot. Why? Too many 401k fiduciaries shop for service providers backwards – they start shopping before they understand their options. When this happens, it can be easy for 401k providers to sell overpriced or superfluous services to 401k fiduciaries due to an asymmetrical information advantage.
401k fiduciaries are obligated to make “prudent” service provider choices. What’s a prudent choice? A provider that offers necessary services at a reasonable price. To make a prudent choice, you should first understand the plan administration and investment options you want for your 401k plan:
- 401k administration options. All 401k plans require fiduciaries to define 6 basic administration options - eligibility, compensation, contributions, vesting, distributions and loans. The process of defining these options is commonly called 401k plan design. To better understand your 401k plan design options, check out our plan design checklist.
- 401k Investment options. All 401k plans require fiduciaries to define just 2 basic investment options – the fund lineup and the nature of participant investment advice. When defining these options, fiduciaries have 2 primary ERISA responsibilities:
- Pick funds that allows participants to sufficiently diversify their accounts (and minimize the risk of large investment losses) and
- Ensure participants only pay reasonable fees and expenses for investments or investment-related services.
Step 2 – Compare professional service providers
Once you’ve determined the options you want for your 401k plan, you’re ready to shop for 401k services. As part of this process, I recommend you compare at least 3 providers based on the following 3 attributes:
- Competence – How long has the provider been in business? Are they adequately insured for losses? Are they growing? Do their services have turnaround standards?
- Services – Does the provider offer services that match the plan administration or investment options you want?
- Fees – Are the fees charged by the provider reasonable when compared to the other providers?
Need more specific help? Check out our shopping companion for help comparing 401k administration service providers.
Feel good about your choice!
I believe the DOL’s fiduciary rule will make it more critical than ever for 401k fiduciaries to ensure their participants receive value in return for 401k fees and expenses. The good news is all professional financial advisors – not just some of them – will now share that responsibility with respect to 401k investment services.
401k fiduciaries should root out all overpriced or superfluous services from their 401k plan. It doesn’t have to be difficult to do that. Following a simple 2 step process can make it easy for 401k fiduciaries to pick professional service providers that match their plan’s needs at a reasonable price.
About Eric Droblyen
Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the company’s operations and service delivery.