401(K) Mismanagement: How to Recognize the Signs

Posted April 19th, 2017 by .

Categories: 401(k).

Each year, millions of hard-working employees invest billions of dollars in their employer’s 401(k) plans because they trust their employer to provide a best of class plan. Often, however, the employer’s endeavors are tainted by a failure of effort, competence and/or loyalty.  Employees’ hard-earned retirement savings are exposed unnecessarily to wasted fees and poor investment performance. But employees need not suffer in silence.  To guard against 401(k) mismanagement, the Employee Retirement Income Security Act of 1974 (ERISA) gives employees victimized by 401(k) mismanagement the right to pursue claims for employer breaches of their fiduciary duties. Recently, there have been a number of cases brought against employers under ERISA for 401(k) mismanagement.  Generally, these cases fall into three areas:

1. Self-Dealing in Mutual Funds Managed by the Employer

A breach of the fiduciary duties arises when the employer uses the plan as a pretext to promote its own mutual fund business interests. As a consequence, the employer who is more inspired by the millions in fees it will earn than it is by its duty of loyalty to employees will load the plan with expensive and/or poorly performing proprietary funds Employees are left with few meaningful options. A number of lawsuits have been filed all across the country against investment advisers who load their own funds onto the plan.  Sanford Heisler’s employment benefit lawyers in New York and San Diego currently are pursuing claims against Morgan Stanley.

2. Excessive Administrative Fees

Scholars have identified a mutual fund’s expense ratio as the most consistent predictor of a fund’s investment returns.  Funds with high fees on average perform worse than less expensive funds.  Therefore, a loyal and prudent employer will not subject its employees to higher cost funds without a valid reason. Too often, however, employers fail to investigate lower-cost options and offer funds with excessive fees compared with similar investment products. A few cases have alleged the excessive fees were used as kickbacks.

3. Failing to Monitor

Employers can become prone to inertia, failing to reassess the plan’s investment options as circumstances change. As a result, poorly performing investment options remain in the plan long after the employer should have removed them. Employees are then plagued by bad long-term investment results. The U.S. Supreme Court in Tibble v. Edison has said this is a failure of due care on the part of the employer.

How Can Employees Protect Their Retirement Savings

ERISA requires employers to send to participants annually a disclosure statement that lists for each fund its fees and expenses, and its investment performance from year to year and how it compares with a broad market index, such as the S&P 500. Employees also can access this statement through an online HR portal. Read it so you can determine whether your plan is best of class or one tainted by a failure of effort, competence, and/or loyalty. A plan with several funds that consistently underperform their corresponding market index, is a “red flag” worthy of further investigation.   Protect your rights – don’t be a victim of financial abuse in the workplace.

Sanford Heisler Sharp’s employee benefits lawyers in New York and San Diego are currently investigating the expenses and investment performance of the General Electric 401(k) plan.  If you have any information that would help us in our investigation, please contact us.

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Charles Field

Charles H. Field is counsel in the San Diego office of Sanford Heisler, LLP, a national law firm with offices in New York, Washington, DC, San Francisco, and San Diego. He received his J.D. from McGeorge Law School in 1986 and his Bachelor of Arts in Liberal Arts from Indiana University-Indianapolis in 1977. Mr. Field also completed European legal studies at the University of Edinburgh and the University of Salzburg.


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