Boeing recently became the latest victim of a 401(k) plan class action lawsuit. These lawsuits are becoming all too common. Many people believe or want to believe that the plans are being run by highly sophisticated and well-trained individuals. Let’s examine what might have led to these lawsuits.
Shifting risk from pensions to 401(k) plans
There’s been a recent move by many governments and municipalities to move away from offering teachers, firefighters, police etc. pensions and replacing them with 401(k) plans. The reasoning for the move is to decrease the cost and risk associated with running a defined benefit pension plan. Pensions require ongoing funding. Many governments such as the City of Chicago and State of Illinois did not properly fund their obligations early on realized that the makeup is contributions is overwhelming or near impossible. They looked for a way to get rid of that obligation and the 401(k) plan seemed to be the answer. It’s been wrongly assumed that by switching to a defined contribution plan that all of the risk is transferred to the participants. While the risk for making ongoing contributions goes away, the risk of investment oversight increases. Poor investment returns on a pension plan mean that the plan sponsor has to kick in more dollars. In a defined contribution pension plan aka 401(k) plan, the risk shifts to investment and plan fee oversight. In the rush to get rid of the contribution risk or simply due to the overselling of the 401(k) plan, these new risks appear to be overlooked. Arguably the 401(k) plan increases complexity and the need for investment fiduciary literacy.
401(k) plan oversimplified and wishful thinking
Believing that there is little risk to themselves, many fiduciaries leave it up to the service providers to run the show. Often investment committee meetings are simply rubber stamps for what the service providers recommend. In many cases there is no one sitting on the side of the company with formal training as an investment fiduciary. Most providers are not taking on fiduciary status and do not have investment fiduciary designations. A few of those designations include Accredited Investment Fiduciary® or Professional Plan Consultant™. These designees can provide practical investment fiduciary education. Investment committee members can also seek out their own designations too.
In order to make sure that the fees participants pay are reasonable, investment committees need comparison cost/service data. That comparison data could come from doing request for proposals. However, the RFP process is time consuming. Instead they could get that information from third party providers such as the Center for Fiduciary Studies. Alternatively, they can work with a retirement plan specialist that provides the data as part of their service.
Many company fiduciaries select providers based on brand awareness. They figure that their brand awareness and size must mean that they know what they are doing. However, what they know to do may have everything to do with that companies profit motive vs. the future of retirement of the plan participants. If they are not a fiduciary, they do NOT have to disclose conflicts of interest that might be inside of their plan recommendation. That’s why you need a knowledgeable investment fiduciary on your company’s side of the table.
Testing your fiduciary knowledge
How would you answer the following questions?
Unfortunately there are many people who call themselves financial adviser. There is no standard for what that means. Many believe that means someone who advises on investments. What you may consider advice, the “financial advisor” considers a recommendation. Legally there is a difference between advice and recommendation (investment advisor representative vs. registered representative). However, financial recommender doesn’t sound quite as comforting.
Registered Representatives are brokering the transaction of buying and selling investments in your plan. They don’t intend to offer “advice” from a legal standpoint. If they do, they are considered an investment fiduciary which they intend to avoid. Unfortunately some company fiduciaries only find out these differences after they are sued by either the Department of Labor or a plaintiff’s attorney. Make sure that you find out what type of financial advisor(s) you have. You don’t just have to have one (see Can adding fiduciary 401(k) advisors lower cost? ) You may select other providers for administration and plan operations that take on fiduciary status. I believe the more the merrier. It may actually lower your cost.