Have you ever taken a minute to check on the funds offered in your employer’s 401(k) plan, or the administrative fees paid to outside vendors to manage it? If not, you should; hundreds of lawsuits have been filed against all types of companies by their employees alleging that their company’s 401(k) plan charges excessive administrative fees or excessive recordkeeping fees, and scores more also allege that employer 401(k) plans offer expensive, poorly performing actively managed funds when they should be providing options to invest in cheaper, higher performing index funds.
Just this month, the Third Circuit in Philadelphia affirmed class certification to yet another one of these cases, Boley v. Universal Health Servs., Inc., which includes more than 60,000 current and former employees who participated in their employer’s 401(k) plan. The Third Circuit held that the employees who filed the case (called “class representatives”) did not need to have invested in all of the challenged funds to represent all participants in the 401(k) plan since they claimed that their employer’s conduct affected all employees who selected investments offered in the plan lineup.
Is it your employer’s fault if your 401(k) loses money?
It is not always your employer’s fault if your 401(k) loses money; it is only under certain circumstances. For example, when the stock market has a bad day and your 401(k) loses thousands of dollars in value, that is not the fault of your employer – that is the unpredictability of the stock market. But when your employer fails to live up to their fiduciary obligations, like allowing the 401(k) plan to hold on to poorly performing, high-cost funds, or when you are forced to overpay for things like recordkeeping charges, they indeed may be at fault. Why? Because employers owe their employees fiduciary duties in connection with their employee benefits, including your 401(k).
What is an employer’s fiduciary duty to its employees?
Most employee benefit plans, including 401(k) plans, are governed by the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that exists to protect employees and beneficiaries in traditional pension plans (sometimes called defined benefit plans in which the employee does not make contributions), 401(k) plans, and health and welfare plans (like retiree medical and life insurance plans). ERISA protects your plan's assets by designating as a fiduciary any person or entity that (1) exercises discretionary control or authority over the assets of a benefit plan or the management of a benefit plan, (2) has discretionary authority allowing them to administer the plan, or (3) is compensated for providing investment advice to a plan.
A fiduciary to an ERISA-covered benefit plan must run the plan:
- with only the interests of the participants and beneficiaries in mind
- with the exclusive purpose of providing benefits and paying expenses
Fiduciaries have a duty to always act prudently; this includes diversifying plan investments to minimize the risks associated with large losses and avoiding conflicts of interest.
What should you do?
Take a moment and look through your 401(k) statements to see how the investment offerings perform. Also, check to see what fees you are charged for the administration of your plan. As a recent federal district court in Connecticut pointed out in Carrigan v. Xerox Corp., “the duties of loyalty and prudence imposed by ERISA are the most stringent duties of their kind under the law.” The court there denied Xerox’s motion to dismiss the case against it for its mismanagement of the Xerox 401(k) plan.
The court noted that a conflict of interest was involved since the recordkeeper that charged excessive fees was a wholly-owned subsidiary of Xerox, and that using a recordkeeper with whom the employer was financially affiliated with was as imprudent and disloyal as paying excessive fees without investigating their cause.
If you think your 401(k) plan might be managed improperly, imprudently, or disloyally, please contact Scott Lempert for a consultation. Kantor & Kantor, LLP, also provides a weekly e-newsletter publication on ERISA cases throughout the nation. To receive your email newsletter, subscribe here.