Employers need to be aware of current developments in the retirement account arena as retirement investors are having success in fighting what some view as predatory practices by the financial services industry. Further, there are pressures in the government to further regulate brokers and others who have influence or control over individual’s investment options. Employers have specific fiduciary responsibilities that they need to understand and ensure they have safeguards in place.
Lockheed Marin Corporation is the most recent large company to have to pay damages related to mismanagement of their sponsored 401(k) plan. In excess of 108,000 employees successfully argued that Lockheed concealed large fees which were excessive and dramatically reduced returns within employee retirement accounts.
They also argued that some investment options designed to provide the employees with stable value were invested far too conservatively which again diminished returns for the employees and did not keep pace with inflation. Lockheed agreed to reimburse employees $62 million dollars without admitting fault in the case. The case is Abbott, et al. v. Lockheed Martin Corp., et al., U.S. District Court, Southern District of Illinois, No. 06-00701.
Separately President Obama has called on the Department of Labor to institute more stringent fiduciary standards on brokers when they are recommending securities for retirement accounts. There would be new requirements that the broker justify recommendations of more expensive or underperforming options.
Under current standards brokers are required to provide “suitable” investment options. The goal of the new requirements would be to curb the tendency of some brokers to push higher cost products that allow the broker to earn higher fees. Many times these higher cost investments do not outperform or even underperform lower cost alternatives.
Other tendencies that legislation hopes to reduce are brokers advising clients to buy and sell products excessively and failing to notify retirement account holders that transferring their assets from a 401(k) to an IRA can lead to higher costs of investing. Modifications of the current rules were attempted in 2010, but later withdrawn after there was strong push-back from the financial services industry.
While employers continue to struggle to comply with complex disclosure requirements, the current atmosphere proves that disclosure is not enough. Employers need to be proactively assessing the performance of investment options in plans. They need review the performance of their advisors and ensure employees have the best options available to them.
Taking a back seat approach to managing retirement plans can expose them to significant legal costs. Now more than ever employers need to be actively engaged with their business consultants to ensure these risks are mitigated.
Ryan Snyder, CPA, is a manager at Mengel, Metzger, Barr & Co. LLP. He can be reached at Rsnyder@mmb-co.com.