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Hidden fees in 401(k) plans have been attacked recently for being excessive, inadequately disclosed and monitored In too lax a manner.
National headlines continue to highlight lawsuits that have been filed against some major companies over their 401(k) plans and the fees their participants are paying. Kraft, Caterpillar, Exelon, General Dynamics, International Paper, Northrop Grumman and United Technologies have been targeted by class action attorneys alleging that the:
* fees paid by the participants were excessive;
* disclosures regarding the fees were inadequate; and
* the plan fiduciaries failed to investigate and monitor the fees adequately.
While still in the early phases, these lawsuits have the potential to set precedents and create an environment for other class action activity.
Employers remain concerned about possible lawsuits since a great deal of complexity surrounds each retirement plan's fee structure, and the fees paid by employees. This article is designed to be a primer to help employers start to understand the fees that they are paying and to help determine whether their retirement plan is being fairly charged.
Plan sponsor's liability
Retirement plans, whether 401(k) plans or defined benefit pension plans, require expertise in administration, investment management and governmental compliance for which reasonable professional fees are paid. However, over the years the industry has evolved to a point where complicated and hidden fee structures make it almost impossible for the average plan sponsor to decipher what they are paying. Because of this lack of fee transparency, an environment has been created where dishonest providers can take unfair advantage of plan sponsors by charging unreasonably high fees and greatly reducing employees' retirement savings. This is where the plan sponsor has risk exposure as it relates to their fiduciary duty. According to the Department of Labor, plan sponsors have an obligation under ERISA to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable.
If the plan assets and potential earnings are being reduced in excess of what is reasonable, then the employer can be liable for the short fall in the employees' retirement savings. For example, assume that a company has a 401 (k) Retirement Plan with $1,000,000 in plan assets, earning an average annual rate of return...