Step 1: Benchmark your Retirement Plan to Avoid Litigation

By December 16, 2015Investing, Retirement/401(k)

gavelFor many years now, the Department of Labor has been steadily attacking business as usual in the retirement plan selling business. Based upon the Pension Protection Act of 2006, final regulations were put in place in 2012 to insure full disclosure of fees to participants and plan sponsors by vendors. The industry fought back hard to win some concessions, but regardless of their efforts, change has occurred.

Armed with newly available fee information obtained from tax form filings and participants, trial lawyers have taken up the charge. Most notably, Schlichter Bogard & Denton out of St. Louis has won numerous suits, including a $57 million settlement against Boeing last month. (Boeing Agrees to Settle 401(k) Plan Lawsuit) This trend of suits and large settlements is likely to continue, and will change the way retirement plans are sold and managed.

Companies with large 401(k) plans have big targets on their backs and are paying the price in court for years of neglect and misunderstanding regarding their 401(k) plan expenses. As fiduciaries, the trustees of retirement plans (usually the CEO and CFO) have a duty to provide a plan to their employees with solid investments at competitive costs. Traditionally, the trustees rely on a commission-based retirement plan broker for investment advice, plan coordination, and cost analysis.

Commission-based retirement plan brokers have little to no fiduciary duty to their clients or the plan participants. That’s a serious problem for plan trustees, who have no time in their busy schedules to become experts on the complex workings and pricing models of 401(k) plans.

New regulations expected to come out early next year take things a step further. Under the DOL’s proposed fiduciary rule, anyone selling retirement plans (or even IRA’s, for that matter) will be held to a fiduciary standard of some level. A wide majority of retirement plans today are sold by commission-based brokers who work for large insurance companies, brokerages, or Wall Street firms. These large firms have little capacity for fiduciary-level client care because they have conflicting profit goals they must achieve for their shareholders.

Despite their best efforts, the DOL’s new rules will do very little to change the way retirement plan brokers sell or behave in the marketplace due to systemic conflicts of interest. So, who can 401(k) plan trustees interface with to insure their plans are priced competitively with solid investment choices?

401(k) plan trustees need to seek advice from outside normal retirement plan sales channels; away from large insurance companies, Wall Street firms and benefit brokerage houses. Registered investment advisory firms, like my firm, that traditionally provide financial planning and asset management for high net worth individuals, are filling the void. Registered Investment Advisers who are not affiliated with broker/dealers, insurance companies, or Wall Street firms, have the best shot at delivering the unbiased advice retirement plan trustees desperately need to protect their plans and participants.

As the regulatory picture in the 401(k) space continues to evolve and unfold, new confusing regulatory requirements and disclosures will only mask the real threat posed by trial lawyers. Your first step towards insuring your plan is not putting an unfair cost burden on its participants is to order a benchmarking study from an independent, third-party RIA firm.

For more information, or to order a benchmark on your plan, contact us by clicking here.

RS