We’re witnessing an overhaul of the 401K landscape. Employees are fighting (and winning!) against high fees, and there’s a new fiduciary standard on the way. These radical changes are a complete overhaul to the corporate retirement landscape.
It’s terrifying, knowing that plan sponsors bear responsibility.
First, some background – this movement started around five years ago. In 2010, a study found that the majority of employers believe their employees have a clear understanding of fees associated with participating in the retirement plan, but 74% of workers are aware of any fees.”
That’s a huge disconnect.
To clear up the disconnect, the Department of Labor introduced the fee disclosure rule. The rule went into effect in 2012, and vendors who received at least $1,000 in compensation must disclose their fees to employers. Employers must then disclose the fees to their employees.
An important, but often overlooked provision stated that plan sponsors are responsible for determining “reasonableness” of plan fees. Fees must be “usual and customary.”
This means disclosing a 401K plan’s fees is not sufficient.
Plan sponsors must take action to ensure fees meet the Dept. of Labor requirement of “reasonableness.” Even worse, there is no definition, so the term “benchmarking” surfaced as a way to measure effectiveness.
The rule was intended to provide consistency among plan providers. The goal was to help both employers and employees make more informed decisions about their retirement plans. However, in the following years there were a large influx of lawsuits. One particular case, Tribble v. Edison International, made it to the Supreme Court.
The ruling in the case could trigger a wave of lawsuits against companies over the setup and management of 401K plans. It was determined to be an ERISA violation by introducing high-expense ratio mutual funds rather than lower-cost institutional funds. While not common in smaller plans, the damage done to the employees was further compounded by Edison’s participation in a revenue sharing model, which required participants to pay overcharges to compensate for the fees for vendors and middlemen, a portion of which was kicked back to Edison.
The ruling came right as the Obama administration began placing heightened scrutiny on retirement plans and the fees charged. The rule changes and court cases are altering how 401K plans are offered. Many providers are changing their plans, plan offerings, and platforms as a result.
There is clearly a perfect storm brewing, and employers need to be notice. Their responsibility to be aware of these new laws and product changes will be overwhelming as the margin for error dramatically narrows – and errors become exceedingly expensive.
Until next week,