A worker investing in a company sponsored 401(k) plan has an expectation that said plan will be managed properly by its administrators. Whether or not those expectations are met is not a matter of preference. Plan administrators have a fiduciary responsibility to protect members and their investments. It is a matter of law.
Administrators are tasked with three primary responsibilities in order to protect investors:
- They must make appropriate investment choices;
- They must avoid excessive fees; and
- They must not engage in self-dealing.
Each of these responsibilities is explained below. What must be understood is that regulations do not spell out exactly how 401(k) plan administrators are to meet their fiduciary responsibilities. The regulations that do exist are vague, at best. That could explain why the Center for Retirement Research at Boston College has reported that the number of lawsuits against plan administrators has increased in recent years.
Making Appropriate Investment Choices
A fundamental rule of investing is that professional investors work on behalf of their clients by utilizing their experience and knowledge to generate positive returns. In simple terms, the pros do what they do on behalf of regular joes who know nothing about investing.
When an employee invests in a 401(k) plan, he or she expects the plan’s administrators know what they are doing. When a company like BenefitMall contracts with the 401(k) provider to offer retirement solutions to their clients, they have the same expectation. Everyone just expects plan administrators to make wise investment choices in order to not only preserve plans, but also growth them.
The fickle nature of investing makes this fiduciary responsibility difficult to enforce. Still, increasing numbers of lawsuits have been filed based on plan administrators not keeping up with the historical performance of the plans they manage. It is a slippery slope that we all need to be careful of.
Avoiding Excessive Fees
The fiduciary responsibility to avoid excessive fees is a bit more easily quantified. Fees can be compared across multiple plans to determine an industry average. Then a single plan’s fees can be compared against that average to determine whether they seem reasonable or not. Yet there is no hard and fast rule stipulating what a reasonable fee actually is. It’s up to plan administrators to set their fees at whatever they deem appropriate.
Not Engaging in Self-Dealing
The last fiduciary responsibility is the easiest of the three to quantify. Rules dictate that plan administrators must always put client interests above their own. If they take action to boost their own bottom lines despite knowing that such actions risk the well-being of clients, they are guilty of self-dealing.
A very clear example of self-dealing is that of a 401(k) administrator preferring its own investment funds over others despite the fact that those funds involve higher fees, have a poor performance potential, or both. According to Plan Sponsor, more than 40 lawsuits have been brought against administrators for such actions since 2015.
Know Your Plan Administrator
Does your company offer a 401(k) plan to workers? If so, how well do you know the plan administrator? The fact is that administrators have certain fiduciary responsibilities intended to protect the best interests of your workers. Unfortunately, far too many employers do not realize plan administrators are not meeting their responsibilities until the damage has already been done.
If your company does not yet offer a 401(k) plan but is hoping to do so, now is the time to start researching plans and administrators. Find a plan with a good track record, positive growth potential, and reasonable fees.