The U.S. Labor Departments new 401(k) fee disclosure rules are about to take effect.
For years the 401(k) plan, to a certain extent, has been something that resembles a national disgrace; rife with conflicts of interest. Revenue sharing – whereby the retirement plan industry compensates many different service providers without disclosure – would in other contexts simply be called bribes. And it’s been going on for years.
But as Justice Louis D. Brandeis famously stated “sunlight is said to be the best of disinfectants”. And that’s what the new rules intend to do; shine some light on the very dense fog of company retirement plans. Let’s hope it helps.
Businesses should not take these new laws lightly. Over the last 12 months, the Department of Labor has been quietly ratcheting up its examinations of firms that serve retirement plans. A labor department spokesman confirmed these examinations as part of a “bigger effort” to examine all areas of employee benefits.
We are even seeing legal judgments pertaining to excessive 401(k) fees previously unheard of. St. Louis attorney, Jerome Schlichter, was victorious in his fight against retirement plan fees when Judge Nanette Laughrey ordered ABB Inc. to pay $35.2 million and FidelityInvestments to pay $1.7 million in a suit over ABB’s 401(k) plan. The judge said that ABB and Fidelity violated their fiduciary duty to employees and retirees by, among other things, “Selecting more expensive share classes when less expensive share classes were available“.
There have been other lawsuits over excessive 401(k) fees recently including one that resulted in a $9.5 million dollar settlement with Kraft Foods.
But liability concerns shouldn’t be the main reason for businesses to pay attention to this issue. The perception of your 401(k) plan – and by extension your entire operation – is at stake. And at a time when few Americans are saving nearly enough for their futures, can we afford to let fees be a confusing factor that discourages participation?
In part two of this series, we will review the three separate disclosure deadlines and what businesses can do to prepare.