The 401(k) Rip-off May Be Ending

Although it is permitted to have participants pay plan expenses, to an extent, participants may not agree. The days of hiding fees within the funds are over. Plan participants may start asking questions before the end of 2012.

Charles Evans Whittaker Federal Courthouse (so...
Charles Evans Whittaker Federal Courthouse (south view), Kansas City, Missouri (Photo credit: Wikipedia)

The inner workings of the 401(k) system are shrouded in secrecy and mired in complexity, which is exactly the way the securities industry wants to keep it. There has been little scrutiny of how investment options are actually selected for inclusion in the plan. Justice Louis D. Brandeis famously statedthat “sunlight is said to be the best of disinfectants”. 401(k) plans have been operating in very dense fog.Lawsuits challenging this unsavory process have had mixed results. Most have been dismissed as having no legal merit. Some have been quietly settled. None have gone to a trial on the merits, until now.

Tussey v. ABB, Inc ( Case No. 2:06-CV-04305-NKL) is a class action brought in the United States District Court for the Western District of Missouri, Central Division, by present and former employees of ABB, Inc, who were participants in two 401(k) plans. The plans included mutual funds managed by Fidelity Investments. Affiliates of Fidelity served as investment adviser to the mutual funds in the plan and as recordkeeper to the plans.

After a four week trial, U.S. District Judge Nanette K. Laughrey issued an extensive opinion. She found that ABB and Fidelity “… violated their fiduciary duties to the Plan when they failed to monitor recordkeeping costs, failed to negotiate rebates for the Plan from either Fidelity or other investment companies chosen to be on the PRISM platform, selected more expensive share classes for the PRISM Plan’s investment platform when less expensive share classes were available, and removed the Vanguard Wellington Fund and replaced it with Fidelity’s Freedom Funds.”

The days of your 401(k) salesman buying gifts for the plan sponsor to keep the business are coming to an end. These salesmen must now show the value they add and if their fees are reasonable.

Please comment or call to discuss how this you and your company sponsored 401(k) plan.

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