People have been talking about this for a while. As predicted, employees can now sue their plan administrator/employer if they don’t have investment flexibility.
Let me explain. Recently a case went all the way to the Supreme Court (LaRue v. DeWolff, 06-856) to decide if you could or couldn’t sue plan administrators/employers for account mismanagement. And on February 20th 2008, the Supreme Court told individual 401(k) account holders “Yes, you can sue plan administrators.” This is a huge breakthrough.
It means that roughly 50 million participants in 401(k) plans can sue not only for excessive fees but also for mismanagement. In other words, they can sue for better investment options. Or at least, that’s how I believe lawyers will take it.
In my 15+ years experience in the financial world, I’ve found that if you give lawyers the slightest inch, they’ll stretch it to a mile. So how will your average attorney define “mismanagement?” You can bet they’ll take it to mean investment options. And that means they could be litigating indefinitely.
Why More Lawsuits Could Actually Be a Good Thing –
If They Get You a Better Retirement Plan
And you know what? I’m going to standup and take a very controversial position. I’ll say being able to sue for a better retirement plan is a GOOD thing. In fact, if there are any attorneys out there who need an expert witness when you sue a 401(k) plan administrator, you can call me.
Why do I say that? For some time, I’ve been ranting about 401(k) plans. I’ve been writing and speaking about how these plans are ridiculously inflexible. I’ve said how your average 401(k) plan has hidden fees, kickbacks and who knows what else. These fees are highest among 401(k)s hawked by insurance companies like Principal Financial, Nationwide, ING, the Hartford and others. Not all plans are bad, but personally I have a problem with an insurance salesman involved with my 401(k).
Now, you finally have a way to fight back against these inflexible plans – and honestly, you probably won’t have to go to court to do it. But more on that in a moment...
You Could Argue Any of These = “Mismanagement”
Most 401(k) plans really don’t help you plan for the future. The majority of these plans only allow you to invest in an absolutely horrible arcane list of mutual funds. These plans give you virtually no assistance or direction in how to manage your retirement fund.
It’s no wonder Americans aren’t saving enough for retirement! They’re working with horrible investments with bad performance and no assistance. What kind of a system is that?
I have been contacted by a number of future retirees who sent me a copy of their plan documents. Several of these plan documents actually said the participant could open up a self-directed account and manage his or her own investments.
But when these participants contacted their plan administrators to take advantage of this option, they were either flat out told “NO” or the plan administrator told them “you can only open up such an account with our hand-picked advisor” (gee no back-end deal there I’m sure). That could be considered mismanagement.
I’ve read some plans that only allow you to invest in large-cap funds. What happens when large-cap growth is out of favor? Not to mention the dollar is sitting at 30-year-lows. If you’re ONLY allowed to invest in dollar-backed funds or large caps, couldn’t you consider that “mismanagement?”
Honestly, it’s up for debate. But with the new Supreme Court ruling, I’m guessing I could make a pretty good argument for this being plan mismanagement. In fact, I predict the right lawyer (and expert witness) could have a field day over these poor investment choices in court. I predict that you’ll soon see more lawsuits doing just that – calling these poor investment choices “mismanagement.”
You Don’t Necessarily Have to Go to Court for a Better 401(k)
Honestly, just the threat of a possible lawsuit could inspire some companies to provide better investment choices. In fact, I predict a number of plan providers will leave the market now that the liability just went up by a factor of 50 million.
But I wouldn’t wait for that to happen. Instead:
- If you own your own company or you can exert influence over the
choices your company 401(k) has, I strongly urge you to get some
serious advice as to what you should really offer your employees. - If you are a participant: Politely, demand better investments and
self-directed accounts. - Ask your plan administrator to find a fiduciary or other investment
advisor you can use to strengthen your retirement plan.
Now that Pandora’s Box is Opened...
To all plan administrators and employers: The Supreme Court has just opened Pandora’s Box and I would suggest you get serious about updating your plan. You must:
- Become transparent
- Get your fees down
- Find an outside retirement advisor
- Modernize your investments
Don’t you want the best for your employees? You have the opportunity to give your employees back the American Retirement Dream. You can help your workers prepare for retirement by offering them the best retirement plan available by giving them investment choices from all over the world at some of the lowest costs around. Give us a call at 888-824-3525.
Wayne Schmidt
Chief Investment Officer
Gradient Investments, LLC
A Registered Investment Advisory Firm and Investment Fiduciary
Home of the Low Cost ETF 401(k)
www.401kTruth.net | www.GradientInvestments.com