Avoiding the pitfalls of 401(k) management.

• Author: Fullen, Milt

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Are you the owner, controller, partner or human resources manager for your organization? If so, you need to be sure your 401(k) plan is being administered correctly--otherwise, you could be subject to litigation, not to mention reducing your participating employee's retirement funds. With a surge of retirees and lawyers looking for ways to fatten their funds, the fine print and selling practices of 401(k) plans are coming under extra scrutiny. Considering our highly litigious society, are you sure your plan is up to the challenge?

AGE OF DISCOVERY

With the coming wave of retiring Baby Boomers, increasing numbers of retirees are turning to their 401(k) funds only to realize they don't have enough money to support their current lifestyle. A significant number of Baby Boomers simply have not saved enough for retirement. The fact is it's now far too late for many soon-to-be retirees to reasonably and routinely correct their savings shortfall. Many of those who can are starting to engage in "crash savings programs."

Pair this desperation with a society where legal remedies are routinely available and pursued whether they are particularly justified or not and you have an explosive (and costly) combination. The result is increased regulatory scrutiny and lawsuits associated with 401(k) plans. While to date most of these lawsuits have been directed at large employers, before the carnage is over many plan sponsors (including small employers), fiduciaries and employers will be impacted.

ROOT OF THE PROBLEM

The problem stems from the evolution and sale of 401(k) products themselves. Over the last 30 years, I've seen the industry become very adept at disguising fees, which has now opened the industry up to a potential avalanche of lawsuits. 401(k) funds used to be sold as an outlet for brokerage and bank mutual funds. As a result, 401(k)s became a way to sell proprietary funds using "invisible" commissions, often in the form of shared fund management fees, concurrent with a sales pitch that the plan cost "nothing." Salespeople who sold these products, and the companies employing them, received commissions. In many cases, they kept collecting that commission even though these fees don't do much more than create a performance drag. As time has passed, 401(k)s have become commodities burdened by these commissions that, frankly, add little ongoing value to participants.

In addition to the disguised commissions, funds can also have...