For those of you keeping score at home, the pace of 401k fee lawsuits is increasing. More and more large companies are being sued and even institutions of higher education and learning are in the crosshairs. I did a recent Google search for “401k fee lawsuit” and nearly 400,000 results come up!
Also, more and more plaintiff’s attorney’s are getting into the mix and a colleague of mine in the industry shared with me that he recently received a VM from a gentleman stating he was “seeking an expert in the standards of care in regards to appointing and monitoring fiduciaries for 401k plans.” Turns out he’s recruiting for a law firm.
One of the more ironic twists over the past few years is the industry that some of the companies who’ve been targeted work in. I’ll give you one guess. It’s the retirement industry! Here’s a list past and pending lawsuits (and awards) for excessive fees against retirement plan vendors and advisors:
- Transamerica – Settled for $3.8m
- Fidelity – Settled for $12 million
- Ameriprise – Settled for $27.5 million
- New York Life – Settled for $3 million
- Morgan Stanley – Pending litigation
- Edward Jones – Pending litigation
- Franklin Templeton – Pending litigation
- Neuberger Berman – Pending Litigation
- American Century – Pending litigation
- Charles Schwab – Pending litigation
- JP Morgan – Pending litigation
The most recent company to get sued for 401k mismanagement is T. Rowe Price. Here’s a sampling of some of the allegations in the lawsuit:
- T. Rowe Price offered between 80 and 95 proprietary, in-house funds to its employees
- Prior to 2012, the funds that were offered were retail share classes and expensive compared not only to funds offered by other fund companies but also compared to the T. Rowe Price funds offered to its clients which were lower cost institutional share classes of T. Rowe Price funds
- Participants allegedly paid more than $50 million in fees for investment advice to T. Rowe Price affiliated entities
- These higher cost funds caused participants to pay over $27 million more in fees than if comparable lower cost options had been provided
- Had these comparable lower cost options been provided participants would have earned at least $123 million more for their retirement
Amazingly, it appears these companies who manage corporate retirement plans for their clients can’t even properly oversee their own 401k plans for their own employees from a fiduciary standpoint. Talk about a case of the “cobbler’s children having no shoes”! Of course, the companies that have settled don’t admit wrongdoing and the ones that have pending litigation will still have their day in court to defend themselves against these allegations.
As someone who has worked as a fiduciary to 401(k) plans for over a decade I can tell you I am not surprised by this at all. What is surprising to me is that many companies think these vendors have their best interests in mind. If you are a plan sponsor or a plan fiduciary, you’ve got to ask yourself “if these service providers can’t manage the fees in their own plans how confident can I be they are helping me manage the fees in my plan?”
This is why the role of fiduciary advisor is so critical and why more and more companies are turning to 401(k) specialists like Greenspring. A specialist advisor with the right experience as an ERISA fiduciary, a commitment to fiduciary principles and practices and the courage and conviction to hold vendors accountable is essential to protecting the interests of participants and keeping companies out of hot water. At Greenspring, our duty and obligation is to be an advocate for the companies and participants we represent and to make sure they are being treated fairly by the marketplace. If you’re a fiduciary to your company’s retirement plan and you haven’t had your plan benchmarked by a specialist firm like Greenspring in the past year you owe it to yourselves and your employees. It’s a great time to be in the market to negotiate retirement plan services. Feel free to contact us to learn more about our 401k fee benchmarking services – we’d love to help.
When you visit a doctor, you probably assume that he/she must do what is in your best interests and not what maximizes that doctor’s income. And you would be correct. Unfortunately, the same cannot be said with financial advisors. Being a fiduciary means that an advisor must legally put the client’s interests first, ahead of the interests of the advisor. This seems pretty basic to us at Greenspring – we have been following the fiduciary standard 100% of the time for 100% of our clients since our founding over 12 years ago.
However, the majority of advisors are not fiduciaries 100% of the time. There are several methods and loopholes to avoid being a fiduciary. You may have recently seen in the news that President Trump has ordered a review of a rule that was going to require the fiduciary standard with certain retirement accounts. Even if this rule does end up going into effect, it still only impacts those retirement accounts, not all accounts or investment products pitched by advisors. In addition, advisors are allowed to register with the government in a few ways, which lets them be a fiduciary when it comes to some activities but not a fiduciary when it comes to others.
Due to these complexities, our recommendation is to utilize a fee-only advisor such as one found at www.napfa.org (an association of fee-only advisors). Fee-only advisors are already subject to the fiduciary standard in all situations for all clients.
So the next time you see a financial advisor, ask them – Are you a fiduciary 100% of the time, or only when the government requires you to be? You might be surprised at the answer.
When we review prospective client portfolios, it is almost guaranteed some portion of their money is invested in some sort of active management strategy. As you may know, active management is the strategy of attempting to beat a benchmark. This could be done through market timing (buying and selling at opportune times) or stock picking (buying winning stocks and selling ones that will underperform). The alternative strategy is often called passive management, though we like to call it "evidenced based" management. Essentially, you own the entire market and don't try to time when to buy or sell securities or pick one stock over another. The "evidence" suggests that this method of investing has a much higher probability of success.
As I was thinking about the idea of probabilities, I thought it might be fun to compare active management to another game that is all about probabilities…blackjack. First, let's look at the statistics on active management. Actual results* show us that 17% of stock mutual funds have beaten their benchmark over the last 15 years. Bond funds fared much worse, with only 7% beating their benchmark during the same period. If the goal of active management is to beat a benchmark, they are not doing a very good job.
So what about blackjack? The odds you will win one hand of blackjack (factoring out ties) is 46.36%. But we are measuring 15 years of whether an active manager can beat the benchmark. What is the chance you will win money at blackjack if you play 15 hands in a row? The answer: 17.5%.
Long story short- you have almost identical odds to walk away with more money after 15 hands of blackjack than you do trying to pick an active manager that will beat the market over 15 years. The odds are much worse trying to pick a bond fund that will beat the market. We all have heard that as long as you play for a long enough time, the house always wins. Maybe you should think about who the "House" is when you are investing and shift the odds more in your favor.
*The US Mutual Fund Landscape, 2016 Report
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.