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.
Schwab Retirement Plan Services recently announced the results of a nationwide survey of 401k participants. When it comes to getting professional 401k advice only a small percentage of participants actually got help even though most people acknowledged their need for such advice and the confidence that would come from it. Participants were much more likely to get help for the following things:
- 87% – Changing their oil
- 51% – Installing a new faucet
- 36% – Preparing their taxes
- 32% – Getting help landscaping
- 24% – Getting help making 401k investment decisions
Clearly, this is more evidence that we have an engagement problem when it comes to getting most people to save and invest wisely for retirement, even though people recognize the need to do so and the peace of mind that comes from with it.
Schwab has put together a really nice infographic that summarizes the results in more detail: Schwab 401k Survey Infographic
A Roth IRA is a wonderful vehicle, especially if someone has already maxed out their other tax-advantaged accounts (e.g., 401K). For those not eligible for a Roth IRA or those who just can’t get enough Roth, there is a relatively new option – an in-plan conversion from a traditional pre-tax 401K to a Roth 401K. Because of 2013 legislation, more participants than ever are now eligible for this conversion (as long as their employers’ plans allow it).
The decision to convert from a standard 401K to a Roth 401K is similar to determining whether to convert from a traditional IRA to a Roth IRA. While there are numerous considerations, the primary advantage is that once it becomes a Roth, no additional taxes will be due. The downside is that taxes must be paid now at one’s ordinary income tax rate (and in most cases, the taxes should be paid from non-retirement accounts). The benefit of converting is due to the concept of “tax diversification” – owning some assets that are taxed now (e.g., Roth) and some assets that will be taxed in retirement (e.g., traditional IRA/401K).
For someone earlier in his/her career who might be at a lower 10%-15% income tax rate, a conversion could be a good strategy since rates are likely to be higher (or at least the same) in retirement. But for someone who is a high earner, the additional income from the conversion could trigger a higher marginal tax rate as well as a phaseout of deductions and exemptions. For these individuals, converting a large lump sum might not be optimal.
Due to the complexities, two sensible strategies could be to a) Contribute a portion of your 401K to a Roth. For example, if you contribute $10,000/year, consider $5,000 for the traditional 401K and $5,000 for the Roth 401K; or b) Instead of a full conversion, convert smaller amounts each year to minimize the tax ramifications in any single year.
As we’ve said before on this blog, it’s very hard to estimate tax rates 10 years from now, let alone 20 or 30+ years away. Before converting a large amount, talk to your accountant and financial advisor so they can help customize a solution for you.
I’m excited to announce that Greenspring has officially launched the (k)larity Quotient℠, a revolutionary new tool to help companies and retirement plan committees manage their corporate retirement plan. We are describing it as the retirement industry’s first “fiduciary performance framework.”
The (k)larity Quotient℠ represents nearly a decade of innovation and research and has been in development for nearly an entire year to create the methodology and build the database.
The (k)larity Quotient℠ offers companies a simple, yet profound method for quantifying the critical aspects of a high performing retirement plan. Using 40 key performance indicators in the 4 key dimensions that drive plan success, they can see how their plan stacks up against other comparable plans. Most importantly, they get a real sense for what’s working, what isn’t and what steps they need to take to improve overall plan management and performance. The goal is to provide a simple and transparent decision-making framework that helps companies improve the quality and effectiveness of plan-related decisions, benefiting both employees and the company itself.
We think the (k)larity Quotient℠ has a chance to revolutionize the retirement industry and transform the way companies design, measure and manage corporate retirement plans by giving plan fiduciaries an easy way to identify and fix issues before they became problems. Plus, it’s a very simple and straightforward process for a company to learn if its plan has a high (k)Q℠. We’ve found it takes roughly 30 minutes for plan sponsors to fill out our questionnaire and gather 4-5 necessary documents.
Check it out at www.greenspringwealth.com/KQ!
What makes a good 401k plan? Last week I offered my perspective on the challenges I see with President Obama’s myRA retirement plan initiative. Today I’ll share my opinion on how companies can design a 401k plan for participants the right way. From a participant’s standpoint, there are only four variables that go into the “retirement savings equation” – what goes into your account (contributions by you and your company), what comes out (fees, loans and distributions), what rate of return you achieve and time. If people are going to retire successfully it’s going to require a combination of sacrifice and an aggressive partnership between workers and companies which I think should include:
- Aggressive automatic enrollment (at least 6%) – studies show that opt-out rates are not strongly impacted by the default percentage so it makes sense to be aggressive – your employees will thank you later
- Aggressive auto escalation (at least 2% per year) – most participants keep their contribution at the default instead of incrementally increasing over time – people need to save more
- Diversified, Low Cost Portfolios – The vast majority of employees will be far better off over time by being invested in a well-diversified, low cost portfolio (with exposure to riskier asset classes like stocks) that is managed for them – plus, a 2-3% return is not going to be enough over time
- Low Fees – Participants should pay no more than 1% in total plan fees (and ideally less than .50%) – to achieve this companies generally need to pay more of the plan’s administrative fees directly
- Company Generosity – Studies show that employees need to save at least 10% per year and in many cases that number may be closer to 15-20%. I believe companies (including my own) have a moral obligation to help their people retire successfully and a 3-4% company contribution just isn’t going to get them there. Companies need to begin to view retirement contributions as not just an expense but an investment in their people and their business
- Time – Accumulating sufficient retirement assets does not happen over night, it takes a long time, which means employees need to start saving as early as possible
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.