Investor Education | New ruling on 401(k) fees

In a new case decided by the U.S. Supreme Court in the term ending in 2015, the nation’s top court ruled that administrators of 401(k) plans have an ongoing duty to monitor fees charged to plan participants. This is an important decision for employers and employees alike.

Background: The Employee Retirement Income Security Act (ERISA) provides certain protections to employees participating in qualified retirement plans such as 401(k)s and imposes fiduciary obligations on those running and administering the plan. For example, ERISA

  • requires plans to provide participants with plan information, including important details about plan features and funding:
  • provides fiduciary responsibilities for those who manage and control plan assets;
  • requires plans to establish a grievance and appeals process for participants denied benefits from their plans; and
  • gives participants the right to sue for benefits and breaches of fiduciary duty.

With a 401(k) plan, participants can defer part of their salary within annual limits to a separate account. For 2015, the maximum deferral is $18,000 or $24,000 if you are age 50 or older. The contributions are invested, and these amounts can grow without any current tax until they are withdrawn. Employees may provide matching contributions up to stated limits.

However, in selecting investments for a 401(k) plan, participants are not able to negotiate the administrative fees being charged. Although the fees are spelled out in the documentation given to employees, as required under ERISA, most participants do not bother to dig that deeply into the details. Thus, they could end up paying more in the way of fees than they realize.

Notably, plan participants should be aware of the differences in fees for retail mutual funds as they compare with institutional funds. Typically, the fees for retail funds may be around 1% of account assets, whereas institutional funds often carry fees of about 0.25%. This difference can prove substantial over time.

In the new case, a class action lawsuit was filed based on the premise that participants in one company’s plan were offered retail fund investments only. Ultimately, the employees prevailed when the U.S. Supreme Court ruled that a statute of limitations did not bar the action.

Results: The Court said that there is a continuing duty — separate and apart from the duty to exercise prudence in selecting investments at the outset — to monitor and remove imprudent investments from offerings. If the plan administrator fails in this fiduciary responsibility, employees may sue for damages.

Conclusion: Employers may wish to review plan procedures in light of this new ruling. In addition, plan participants should review their plan’s investment selections. This ruling may have a significant impact going forward.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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Investment Consultant Tam Hubert, CFP®, CFA

Investment Assistant Kristi Remus

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