With the rash of lawsuits about excessive 401(k) plan fees, many in the industry are questioning how we got to this place.
It’s a bit of a perfect storm. Most plan sponsors, in the best interest of their employees, implemented a 401(k) product and essentially let it take care of itself. What the plan sponsors didn’t fully understand, however, is that as plan expenses accrued, they were passed on to the participants. The result? The employer plan fees may have stayed the same whereas the employee fees may have increased or the fees are no longer reasonable for the level of service the plan receives, causing employees to actually lose retirement savings.
While ignorance is no excuse, this inadvertent oversight by plan sponsors caused different levels of financial industry experts – including counsel – to take a closer look at the situation, particularly as it related to larger plans. Detailed scrutiny revealed that the 401(k) plans were neither being properly managed nor were reasonable fees assessed in compliance with ERISA – a fiduciary breach that is directly detrimental to plan participants.
Enter the courts. Lawsuits were brought, contending many of the plan sponsors’ existing 401(k) plans contained a lot of “fat,” meaning plan sponsors were gaining from asset-based plans. The legalistic questions then centered around whether plans were chosen for this purpose, and/or why a plan sponsor chose a particular product over a similar but cheaper alternative.
The Supreme Court ultimately landed on plans having to be the “leanest,” not necessarily the cheapest. For plan sponsors, that means justifying the 401(k) plan selection. If a product offers particular services that are beneficial to employees and that product costs a little more than another, it is a justifiable selection. For example, collective trusts investments may be less expensive than some mutual funds but difficult to track because their share prices may not be reported daily like mutual funds. Provided that’s important to the majority of employees, the employer is within its rights to select a mutual fund over a collective trust. The simple rule to follow is to choose investments with reasonable fees for the services provided and that are in the best interest of the plan participants.
Plan sponsors have a fiduciary responsibility in 401(k) plans and are looking to financial advisors for products that help them meet their ERISA obligations. Recent trends suggest that this obligation extends to making sure each and every plan participant is put in a position to make informed decisions about their own retirement readiness. CoPilot was created for exactly this situation. CoPilot offers a 3(38) investment manager to alleviate the plan sponsors fiduciary responsibility over investment selection. For the participant, CoPilot is designed to proactively apprise participants of their status, actively engage them in planning a comfortable retirement and help them confidently answer how many years of retirement their savings will buy.
Is CoPilot right for your clients or you as an employer? Let’s start the conversation. Contact us online or call 800-236-7400 (option 1) today to learn more.
John Nahacky, JD, CPC - Compliance Manager - firstname.lastname@example.org - 800-236-7400 X3250
John is the subject matter expert on rules, regulations, compliance, plan design, and year end requirements.