When the first 401(k) retirement plan was established back in 1980, it was envisioned as the third pillar of the retirement savings trinity. Social Security would account for basic expenses, your pension plan would help you maintain your current standard of living, and your 401(k) would provide discretionary funds (i.e. “fun money”). Together, these three would provide hard-working Americans with a variety of vehicles to save for a comfortable retirement.
However, in spite of these lofty ambitions, only 18% of Americans today are prepared for retirement. Near-retirees age 55–65 have an average retirement plan account balance of $25,000. About a third have nothing saved for retirement at all. All told, these numbers suggest we are on the verge of a retirement crisis in this country.
This situation has not gone unnoticed. The past few weeks alone have seen over twenty new lawsuits filed against retirement plan fiduciaries, with settlement requests from $1 to over $300 million. Cited throughout most of these class action suits are wrongdoings including breach of fiduciary responsibility, excessive fees, and lack of oversight.
So where did things go wrong?
IS IGNORANCE AN EXCUSE?
In the 1950s, tobacco companies promised clients health, strength, and vitality through their product. Doctors openly endorsed cigarettes as a cure-all. Even expecting mothers were encouraged to have a few puffs per day. By 1965, fully 42% of Americans were smokers. [1] Smoking was an American rite of passage and cultural expectation. However, as history and medicine both bore out, the truth was the opposite: today, it’s common knowledge that tobacco use causes cancer.
The first major research report linking smoking tobacco and lung cancer was published in September, 1950. [2] By the mid-1950s, the first individual suits against the companies responsible for manufacturing and marketing cigarettes began to materialize. Plaintiffs claimed that tobacco companies were guilty of negligent manufacturing, fraudulent advertising, and violations of various state consumer protection statutes.
The tobacco companies pleaded ignorance: they claimed they simply didn’t know smoking tobacco caused health problems. For decades, this excuse was enough to keep them from being held liable; then, in 1994, states across the country sued, and they ended up paying out a settlement of $250 billion dollars. [6]
Just like the tobacco companies, many plan sponsors today are pleading ignorance. They say they simply didn’t know of their fiduciary responsibilities, including prudent oversight, fee benchmarking, service provider oversight, investment due diligence, reasonableness of costs, and others. And just like the tobacco companies, pleading ignorance will only work so long before the lawsuits start drawing blood.
EMPLOYER PRESCRIPTION
Documentation is the single most important thing you can do to protect your retirement plan – and document everything. The Employee Retirement Income Security Act (ERISA) mandates that you demonstrate that all plan actions are taken for the exclusive benefit of plan participants and that all plan decisions are made following a decision-making process of prudency, loyalty, and duty of care. If it’s been a few years since you last benchmarked your company’s retirement plan, you should seek out professionals that can help you assess your current costs and work with you to help document your processes.
Plan fiduciaries who haven’t reviewed their own practices are well-advised to review their due diligence process, review plan fees, and evaluate investments. Ignorance is not an excuse – plan sponsors are responsible for knowing, understanding, and following ERISA rules and regulations. If your retirement plan committee feels that they need guidance, or that they lack the time, skill, or understanding, they should seek out the help of a professional (e.g. fiduciary advisor, attorney, TPA).
Also, since plan fiduciaries have a consistent and continual responsibly to monitor plan investment offerings (Tibble v. Edison, 2015), keep in mind that a comprehensive benchmark analysis should also include investment review. Better to do it now than be forced to by court order – especially if that order forces you to adopt new procedures and/or hire an independent fiduciary not of your choosing. [4]
Plan documentation should include:
- Meeting minutes
- Materials that show the cost and performance of current options as well as available alternatives
- Documentation of the service provider selection process and its key criteria
- Understanding of actual or potential conflicts of interest surrounding such information
The bottom line is, ask: “how is this in the best interests of the plan participants?”
BIG TOBACCO AND RETIREMENT PLANS
Tobacco companies managed to avoid being held liable for cigarette-related illnesses for 40 years after the first evidence came out. By a terrifying coincidence, ERISA has been on the books for 40 years as of right now.
In a recent article, Marcia Wagner, managing director of the Wagner Law Group of Boston, stated that “[plaintiffs’ lawyers] are looking for the next class-action bonanza, and […] it’s most likely going to be in the ERISA area.” Take precautions, or you could end up part of the next $250 billion-dollar settlement.
Here’s one last thought to consider: if your fiduciary folder is empty, how can you show your plan participants why their service provider is X, why their investments are Y, and why they are paying Z? Take the time to document so that in the event you do get sued, you have solid evidence that you were acting in the best interests of your plan participants.
[1] http://www.infoplease.com/ipa/A0762370.html
[2] [ Doll, R.; Hill, A. B. (1 September 1950). “Smoking and Carcinoma of the Lung”. British Medical Journal. 2 (4682): 739–748.
[3] The Cato Institute: Speakers Bureau – Robert A. Levy
[4] http://www.benefitnews.com/opinion/401-k-fee-litigation-finds-new-targets
