If you are a 401(k) trustee, you could be sued for less than expected returns!

Apr 19, 2017, 9:41:39 AM

shutterstock_215430139.jpgIt may sound inconceivable, but I recently realized that as an employer and the trustee of my company 401(k) plan, I’m at risk of being sued by plan participants who are unhappy with their returns.  I didn’t think this was even possible since I’m not the person responsible for managing the funds under management.

But this is indeed the case.  In fact, to my surprise (should I be?), in my own home town of Denver, there is a local attorney who is running ads during the morning news program trolling for “anyone who feels that their 401K plan returns weren’t good enough.”  I have to admit, it’s a great sales pitch because I don’t know anyone (no matter how good their returns are) who doesn’t wish they could have done better.  I suspect their phones are ringing off the hook too!

After further investigation, I realized that this spate of legal action has been increasing.  Over the last year there have been a rash of lawsuits filed against employers and trustees of company 401(k) plans (BlackRock, T. Rowe Price, J.P. Morgan). More specifically, these lawsuits contend that the employers and trustees have engaged in “self-dealing” which involves creating or selecting high cost investment funds for their 401(k) plan and limiting the number of low cost funds from other fund manufacturers in order to profit from the plan.  In this scenario, the best interest of the employer/trustee is placed ahead of the plan participant.

Other suits contend that their employers are “asleep at the wheel,” providing minimal review and oversite of very large 401k plans. These suits take on a mix of factors ranging from the types of funds available for investments (and their performance over time), as well as detailed scrutiny of fees. One of the highest profile of these suits involved a $64 million settlement from Lockheed Martin with employee plaintiffs.

What can employers and 401(k) plan trustees do to defend themselves against the risk of suit?

Well, the short answer is that you should treat your plan participant’s money as if it were your own.  That means:

  1. Doing a regular, detailed review of the plan with your advisor which includes performance and the selection of available funds. When we asked that our advisor perform this review on our small plan, two thirds of the funds got swapped out (more than at any other time in the history of our 401(k)).
  2. Insisting that a detailed review of plan fees is conducted. This is related to, but can be separate from the prior review of investment funds. In our case, we have various fund administration fees, the level fee advisory charges and other expenses including fund management fees.
  3. Ensuring that the fees and fund performance is benchmarked against other 401(k) plans of similar size – both number of participants and assets under management.
  4. Working harder to ensure that plan participants/investors understand how the plan works. This can include: types of funds and the risk associated with each, costs to the participant versus costs to the employer/trustee, liquidity, expected returns, etc.

I highlight suggestion #4 because I believe it is probably the most important thing you can do to reduce the risk of you (the employer/trustee) getting sued. 

But it doesn’t end there.  If you get sued, you’re going to need what we call “evidence of comprehension.”  You want to be able to prove that the participant not only received the information, but that he/she understands the information.  This is the central tenet of the DoL Fiduciary Rule that was enacted by the Department of Labor (DOL) and why my company, Istonish, created a solution called Aprisi Assure, our independent, multi-channel, third party verification technology solution that uses a combination of interactive voice response and live agents to verify, capture and reinforce written disclosures of high level agreements and terms.

Our solution, which has been in use by the telecommunications and cable industries for more than 15 years, helps companies comply with Section 258 of the Telecommunications Act of 1996.  These regulations were enacted by the Federal Communications Commission (FCC) and the Federal Trade Commission (FTC) to stop the practice called “slamming and cramming” whereby operators would illegally switch a consumer’s phone service or add charges for services without a consumer’s permission.  We’ve retooled this solution to address the specific needs and concerns of the retirement planning industry.

To learn more about how third party verification can help you build trust and capture “evidence of comprehension,” download the white paper I co-authored with Marcia S. Wagner, Esq. from The Wagner Law Group.  It's titled, “Evidence of Comprehension: Managing Litigation and Regulatory Compliance Risks Under the New DOL Fiduciary Rule and ERISA.”


Annette Quintana

Written by Annette Quintana

Annette Quintana is the CEO of Istonish Holding Company, a privately held, Native American- and Latino-owned information technology services company established in 1990. Headquartered in Denver, Colorado, Istonish helps organizations, individuals and communities to be great through innovative technology solutions. Annette’s unique capacity to inspire her team to deliver successful results stems from her enthusiastic commitment to this vision. Under Annette’s leadership, Istonish has grown and evolved to serve government agencies, private companies large and small, and mission-driven not-for-profit organizations throughout the Mountain West.

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