Planning Ahead to Avoid 401(k) Suits

By Mark Bruno

May. 1, 2008

Given the threat of litigation over 401(k) fees, observers suggest that companies now, more than ever, need to consider the oversight and procedures involved in running their retirement plans.

    For starters, corporations should maintain detailed records of their entire decision-making process, beginning with requests for proposals that may have been issued when they launched their search for a fund manager. “It’s all about the paper trail,” says Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries. “You need to show you have due process, from beginning to end.”

    At the same time, both Graff and Judy Schub, director of public policy at the Association for Financial Professionals, suggested companies could increase their use of independent fiduciaries—third parties that, among other things, can take on decision-making responsibility for plan sponsors with less potential for conflicts of interest.

    At the very least, experts say, companies must consistently examine, on an ongoing basis, the fees and performance of the funds in their 401(k) plans.

    Indeed, since such suits were first filed in 2006, large companies have been reviewing their 401(k) fees at a much steadier clip—and many even appear to be successfully negotiating with their service providers to lower costs. Last year alone, close to 80 percent of large 401(k) plan sponsors polled by Greenwich Associates said that they had reviewed the fees in their plan at least once.

    “[These are] encouraging numbers, because it was just a fraction of companies that were doing this consistently only a few years ago,” Graff says.

    Still, the fact that about 20 percent of large employers reported that they did not review their fees in the last year is “amazing,” Graff remarked. He added, however, that “in another year, every large company will probably have done at least one review.”

    These reviews are proving to be more than just a formality: More than half of the companies surveyed also reported that they were able to negotiate for lower fees afterward.

    “Fees were historically on autopilot at a lot of companies,” says Chris McNickle, managing director at Greenwich. “But as these suits have come about, and as 401(k) plans have gotten larger, companies have had greater incentive—and ability—to secure lower fees from their service providers.”

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