THE CASE FOR LAWSUITS AGAINST 401(K) PLANS
Q: We keep hearing about participant lawsuits against 401(k) plans and strive to do our best to avoid situations that could lead to one. Part of that is using prudent processes in the plan. We have asked our advisor and done some searching on our own but haven’t been able to find a definitive definition of what processes are truly prudent in this context.
A: Since the inception of ERISA, the prudent person rule has provided a good rule of thumb. To paraphrase, it states that an appropriate decision is one that a prudent person, with similar skill and circumstances, would make. You are correct that it lacks precision, and that’s why process is so important; the Center for Retirement Research at Boston College studied the major causes of 401(k) lawsuits and determined that they often hinge on whether a prudent process was followed. The study found the most common reasons for participant legal action are excessive plan fees, poor investment options and self-dealing behaviors. To illustrate: Some plan sponsors fear the higher fees associated with actively managed funds, so they offer only passive funds. But courts don’t automatically consider higher fees to be excessive, if they are clear and are providing value in exchange for the fees. In fact, a too-conservative approach may also be detrimental to participants. A prudent process for selecting the funds may provide a satisfactory defense if a participant does decide to sue. Our best suggestion is to thoroughly review all processes in the plan with prudence in mind. Read more at https://crr.bc.edu/wp-content/uploads/2018/04/IB_18-8.pdf.
DO YOU HAVE A PRUDENT PROCESS OR DID A SPECIALIZED 401(K) ADVISOR HELP YOU WITH ONE?
LACK OF EMPLOYEE EDUCATION - A CASE FOR FINANCIAL WELLNESS
Q: I overheard a surprising conversation between two of our employees. In short, one told the other that his 401(k) account at his former company just goes back to his ex-employer. I brought the employee in and gave him the contact information for our plan’s advisor so he can get correct information from her. But it made me wonder how we’re really doing in educating employees about our plan.
A: Communicating with employees about the plan is at least a 2-part process. Part 1 is providing the education, and Part 2 is determining how well it works. You are fortunate to have stumbled upon Part 2. Don’t feel bad if your education efforts are falling short, though, because you aren’t alone. Fisher Investment 401(k) Solutions found some holes in participants’ understanding of their 401(k) plans, through their 401(k) Wellness in the Workplace Survey, covered in 401kSpecialist Magazine, https://401kspecialistmag.com/401k-fail-how-well-do-you-score-on-the-following-quiz/?utm_source=401k&utm_medium=email&utm_campaign=401k_enl_07062019_WEEKEND
The knowledge gaps uncovered by Fisher may help you determine the next topics to address for your employees. A few subjects on which you may want to educate employees: loans, taxes and asset classes. One third of Fisher’s survey respondents thought that most plans don’t allow loans, 23% did not know their contributions reduce their taxable income, and 77% could not accurately define “mutual fund” when presented with a list of descriptive statements.