Spotlight on 401(k) fees may help many saving for retirement

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Plan sponsors have a duty to decide for the exclusive benefit of the participants and thier beneficiaries. This duty extends to knowing and understanding all fees in their qualifieds retirement plan.

The hope is that, as employees ask questions about the new fee statements, employers will be motivated to negotiate the best deal they possibly can. In about a dozen lawsuits, St. Louis attorney Jerome Schlichter alleges that major companies haven’t always done that.His latest suit, filed last month, is against Minneapolis-based investment firm Ameriprise Financial. The suit accuses Ameriprise of investing 401(k) money in its own RiverSource mutual funds despite high fees and sometimes lagging performance.

Ameriprise also “used the retirement assets of Ameriprise employees to seed new and untested mutual funds, which made those funds more marketable to outside investors,” the suit alleges. It says Ameriprise employees lost more than $20 million.

Schlichter says the allegations are similar to those that his firm made against General Dynamics and Caterpillar, both of which had subsidiaries that managed their 401(k) plans.

“They must operate for the exclusive benefit of employees and retirees, and they can not operate for their own benefit in any way,” he said. Schlichter reached out-of-court settlements with General Dynamics for $15.15 million and Caterpillar for $16.5 million. Several other 401(k) cases are still in the courts, including one against Kraft Foods that is scheduled for trial next month.

Schlichter portrays his suits as a way of cleaning up an overpriced and opaque industry, but some consultants doubt they’ll have much effect.

Patrick Shelton, managing member of Benefit Plans Plus in Creve Coeur, believes the class-action approach “doesn’t help plan participants at all.”

Dan Weeks, founder of 401(k) information firm BrightScope, thinks the threat of lawsuits may motivate large companies to keep a closer eye on 401(k) fees, but smaller employers probably don’t have to worry about class-action suits.

“I hope that the market becomes more transparent through disclosure rather than through litigation,” Weeks said.

Hidden costs in 401(k) plans can prevent many Americans from successfully retiring.

Please comment or call to discuss how this affects you and your employees.

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Retirement Plan RFPs Every 3 Years – The New Normal?

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When you consider all the changes taking place this is a excellent solution to verify the quality of your retirement plan. Your employees and yourself require the best possible plan in order to successfully retire. A well managed retirement plan has the ability to attract and retain top talent.

In the preamble to its 2010 service provider fee disclosure rules, the Department of Labor (DOL) assumes (or one might say suggests) plan sponsors conduct an RFP about every three years. While this is contrary to industry studies concluding a majority rely on outside consultants or studies instead of RFPs, the 2011 Seventh Circuit Court of Appeals decision in George v. Kraft Foods is reinforcing concerns this is the new normal for a prudent plan fiduciary.Kraft’s 401(k) plan participants sued for breach of fiduciary duty alleging Kraft should have done an RFP every three years and this failure resulted in payment of excessive investment fees to the plan’s service provider. A lower court accepted Kraft’s defense that it relied on expert outside consultants to ensure fees were competitive when extending that service provider’s contract multiple times and granted summary judgment in Kraft’s favor. On appeal, the Seventh Circuit rejected that as an absolute defense and sent the case back for a trial, which could end up costing more than settling.

The retirement crisis will result in additional regulations. Plan sponsors must take their company sponsored retirement plan more seriously or risk employee and regulatory backlash.

Please comment or call to discuss how this affects you and your company.

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Court Rules Kraft’s 401(k) Plan May Have Holes

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Plan sposnors as well as plan participants must understand that their 401k plan is a retirement savings vehicle and not a venue to speculate. When planning for retirement we must address two components, expected return AND expected risk.

The plaintiffs are participants in Kraft’s defined contribution plan, which had assets ranging from $1.5 billion to $5.4 billion between 1994 and 2010. They brought a class action alleging that Kraft and others breached their fiduciary duty by including two actively managed funds, a Growth Equity Fundand a Balanced Fund, among the investment options available to plan participants.The consultants to the plan only considered funds with a minimum seven year track record, with at least $500 million under management. They focused on the past returns of the funds selected, which were the primary determinant.

This focus on past performance is typical of the way actively managed funds are selected, even though (as everyone except consultants to benefit plans is aware) past performance is not predictive of future performance. One study looked at hiring and firing decisions by 3,700 plan sponsors (public and corporate pension plan, unions, foundations and endowments) over a 10 year period from 1994 to 2003. Three years prior to hiring, the fund managers selected all had stellar records of beating their benchmarks. Post hiring excess returns were zero or less.

This case is an excellent representation of how retirement plans are sold to many plan sponsors. I have taled with many advisers who boast of their “26 point check list” when screening mutual funds. These screenings are for the most part worthless.

Please comment or call to discuss how this affects you and your compoany plan.

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