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Is Your Organization’s Retirement Plan A Money Pit?

In the 1986 comedy “The Money Pit” starring Tom Hanks and Shelley Long, a couple purchases a country estate outside New York City for a suspiciously low price.  As the doors fall of their hinges, staircases come tumbling down, and a bathtub falls through the floor – frustration grows for the couple as their dream home increasingly looks like an awfully poor investment.

Unlike the movie, employees these days are not laughing when it comes to a different type of significant financial investment:  their company retirement plans.  With greater frequency, there is a growing realization by employees that their retirement plans have been chipped away by excessive and often hidden fees inserted into the fine print by plan providers.

As a result and in order to maximize retirement incomes, it is imperative for both employees and employers alike to be aware of these seemingly out-of-site fees as well as mindful of the potential personal liability that can come with administering a company’s retirement plan.

SMALL FEES ADD UP TO BIG LOSSES FOR EMPLOYEES

Just how costly can these management fees be in terms of eroding an employee’s retirement funds?  According to Vanguard, a $10,000 initial investment with a 6% annual return equates to just shy of $100,000 after 25 years.  However, here’s the problem: Using a modest expense ratio of 1.20%, that same employee would only collect about $64,673 since $33,673 in fees would have been paid over the life of the investment.

As recently described by United States Labor Secretary Thomas E. Perez, “[T]he corrosive power of fine print and buried fees can eat away like a chronic illness at a person’s savings.”  On the other hand, as reported by CNBC, even as small as a 1% reduction in fees can add an additional ten years to a participant’s retirement income.

THE PRE-2012 WILD WEST ERA OF 401(K) FEES

Concerns over the grinding down impact fees have on retirement plans have grown exponentially in recent years as employee’s have become aware – often for the first time – that they are even paying such fees.  Unfortunately for many unsuspecting employees, until 2012 the 401(k) plan industry went largely unchecked with their fees not having to be legally disclosed – thereby allowing plan administrators to avoid accountability.  Sadly, by that time the corrosion of retirement funds was already well under way for plan participants.

In the wake of mounting worries that employees’ hard-earned retirement savings were being exploited, in 2012 the Department of Labor started implementing regulations to require disclosures to participants ensuring transparency regarding the fees they are paying.

EMPLOYERS BEWARE:  THE PENDULUM IS SWINGING TOWARDS GREATER ACCOUNTABILITY

In 2015, the Obama administration announced that hidden fees and backdoor payments were costing Americans $17 billion per year.  According to the White House, employees need look no further than their own financial advisers when determining who to blame for these losses.

“[T]he rules of the road do not ensure that financial advisers act in their clients’ best interest when they give retirement investment advice.  Instead, some firms incentivize advisers to steer clients into products that may have higher fees and lower returns.” – whitehouse.gov

As a result, there has been a fairly dramatic expansion to the definition of who constitutes as a “fiduciary” by not only the Department of Labor, but also the judicial system.

THE EMPLOYER’S INCREASED EXPOSURE TO PERSONAL LIABILITY

Perhaps the most drastic recent change in the 401(k) landscape is the increased attention placed on the “fiduciary” duties owed by employers and members of retirement plan committees and the personal liabilities they face under the Employee Retirement Income Security Act (ERISA).

As noted by some courts, ERISA demands that fiduciaries act exclusively in the interest of  beneficiaries and with the type of care, skill, prudence, and diligence under the circumstances – not of an everyday lay person, but one with experience and knowledge with beneficiary matters.  Consequently, 401(k) plan fiduciaries must be wary of the dangers and consequences they face by failing to engage in prudent decision-making with respect to employee benefit plans.

If you are on the retirement planning committee, a trustee, a plan administrator, or have anything to do with investment decisions at your organization, you should be asking yourself these questions:

Do you have any discretion or control over the plan?

Fiduciary status is based on the functions performed for the plan, not just a person’s title. It is the plan fiduciaries that will be held most accountable for damages.

Is your plan administered by a TPA (third party administrator)?

Often these service agreements specifically name the employer as the plan administrator, which means ERISA compliance is your responsibility.

Has our organization been benchmarking and evaluating the plans performance?
What costs are employees being assessed?
How competitive are those costs to the market?
What meaningful benefits are being realized by those employees?
Are all costs being clearly disclosed when assessed?
Has our organization been offering financial literacy and guidance to our employees?

If you are unsure on the answer to any of these questions, you should consider plan design and fiduciary review by an independent 3rd party and consult with legal counsel to fully understand your potential liability.