Have you pondered why your employer chose the particular 401k platform with which you are saving for retirement? Your employer has a fiduciary duty to ensure that you are provided with a 401k product that offers you a reasonable opportunity to achieve retirement income security – you just need to fund it adequately!
We all have various duties, but it’s important to understand that your employer’s fiduciary duties are mandated by the Employee Retirement Income Security Act (ERISA). Fiduciary duties have been described as “the highest known to the law” and the individuals responsible for choosing your 401k platform can be held personally liable for any fees that are deemed to be unreasonable. See Donovan v. Bierwirth, 680 F.2d 263 (2nd Cir. 1982) In fact the individual employees who served on the ABB, Inc. pension and benefits committee were recently found jointly liable, along with ABB, Inc., for $35.2 million because they failed to properly document and monitor 401k fees!
Despite the complexity of fiduciary duties, there is no mandatory training for fiduciaries. However, ERISA requires that if an employer doesn’t have the expertise to fulfill the highest duties known to the law, they must engage a qualified, independent expert – and here is where fiduciariness comes into play.
Truthiness, Fiduciariness and Lemoniness
Stephen Colbert coined the term truthiness which is defined by Miriam-Webster as “the quality of preferring concepts or facts one wishes to be true, rather than concepts or facts known to be true.” In an excellent blog post Chuck Humphrey, Employee Benefits & ERISA Counsel for Fiduciary Plan Governance, LLC. applies truthiness to the 401k industry.
Humphrey is more direct than Colbert writing that “truthiness is a clever way of characterizing what is in fact lying…” and coins the word fiduciariness which more accurately describes the practices of some 401k plan vendors. He defines fiduciariness as “the selling by the financial service industry the concept or fact of assumption of fiduciary status to 401(k) plan sponsors who want it to be true, rather than it actually being true.” There are many employers who are, unknowingly, the victims of fiduciariness. They might have thought they engaged a qualified, independent expert when in fact they only hired a well-trained salesperson whose company rejects any fiduciary responsibility whatsoever. To learn more about fiduciariness see The Wizard of Oz, Retirement Plans & You.
If your employer is the victim of fiduciariness, then unfortunately so are you. This is because those 401k vendors who practice fiduciariness, often sell what might be considered fiduciary lemons. Scott Wooley aptly describes these products in Retirement Plans from Hell . Simply, these are 401k products fraught with hidden, hard-to-find fees that pilfer away your 401k assets as well as your prospects of retiring with dignity. Just as truthiness is a euphemism for lying, pilfer is a euphemism for stealing – how else might one describe continuously taking small amounts of your 401k assets without your knowledge and consent?
If the Food & Drug Administration was responsible for regulating the 401k industry, these products might come with a warning label which read: This 401k product may be harmful to your retirement income security! However, there is no government agency responsible for regulating the marketing materials and representations of 401k vendors. Ironically, the regulator responsible for punishingfiduciariness is a private corporation, bought and paid for by Wall Street, and accurately described by Madoff whistleblower Harry Markopolos as a “very corrupt self-regulatory organization.”
Regrettably, lemoniness comes in too many varieties to discuss here; however, there is something that you can do. As of 2012, your employer must provide you with what is known as a Rule 404(a)(5) fee disclosure. Ensure you read it and if it isn’t clear to you exactly how much your 401k plan is costing you, demand an explanation from your employer who in turn should demand an explanation from your 401k vendor. To learn more about how some 401k vendors intentionally hide how they pilfer your money See Rule 408(b)(2): The New Fiduciary Paradox . If you don’t motivate your employer, no one else will and it’s your retirement income security that is at risk!
About the Author
Mark Mensack Mark Mensack, AIFA®, GFS® is the Principal of Mark D. Mensack, LLC., an independent fiduciary consulting practice affiliated with Fiduciary Plan Governance, LLC.. His expertise is in the area of fiduciary best practices, 401k hidden fees and ethical issues in the retirement plan marketplace. He has eighteen years of financial services experience; fourteen as a financial advisor with broker-dealers, and four as an RIA. Mark has a Masters in Philosophy from the University of Pennsylvania and is a former US Army Officer. His final active duty assignment was on the faculty of the United States Military Academy at West Point, NY where he taught Philosophy, Ethics & Critical Reasoning. Mark also writes the 401k Ethicist column for the Journal of Compensation & Benefits and some of his work can be found at www.PrudentChampion.com. Mark welcomes examples of ethical issues in the retirement plan space, and especially misleading 401k marketing materials at 401kEthicist@PrudentChampion.com.