Who reads the fine print? Anyone? Of course not. Not on your new cellular phone and even less when entering any given website full of cat videos.
But what about a 401(k) plan at work? You’d think that would deserve a close read.
A client of mine shared the contract he got from one plan provider. I pointed out to him a clause that should make any business owner’s hair stand on end.
It reads, in part:
“The Employer understands the investment alternatives available within the Program and agrees that none of the Indemnified Parties provide investment advice … [the Employer] is solely responsible for selecting the investment options for the Plan …
“None of the Indemnified Parties … will act as an Investment Advisor to the Plan … and none of them will have any responsibility with respect to the selection or retention of investment options for the Plan or the investment of any Plan assets. The Indemnified Parties expressly disclaim all responsibility for any oral or written statement made by any party concerning the risk, suitability or performance of any investment option.”
To be completely clear, the business owner is “the employer” here. The “indemnified parties” are the plan provider and anyone who works for the plan provider.
So who is the responsible party? The business owner!
Most business owners do not grasp the weight of this shift in responsibility. In fact, they don’t even realize they are running this specific business risk, and it’s a big one.
Since the plan provider is off the hook, that means the plan sponsor (the business owner) is responsible for the performance of the investments his or her employees choose in the plan.
You might think, “Come on, really?” But it’s true, as an increasing number of firms large and small are learning. Employees unhappy with their 401(k) investments’ performance are launching massive class-action suits against their own companies over these plans.
The complaints are various, but it all comes down to the argument that the employer failed to recognize that expenses were too high in the plan, costing employees gains they would otherwise have realized over many years, or that investment choices were poorly thought out.
Costs are too high in many 401(k) plans, something companies are moving to correct by offering low-cost index fund options. But the underlying risk problem doesn’t go away: The business owner in many plans is considered the “fiduciary,” the responsible party, for the plan and its outcome for employees: how much money they end up with for retirement.
Cutting exposure
Law firm Seyfarth Shaw reports that the top 10 settlements in retirement plan cases in 2021 more than doubled to $837 million vs. $380 million the year before. The increase was mostly “class action filings challenging defined contribution plan (401(k) and 403(b) plan) fees and investments,” reports Morningstar.
Colleges, hospital chains, tech companies, the list goes on. What I tell my clients is, first, be aware of the risks you take on by starting a 401(k). While offering a retirement plan is a great retention tool and can provide significant tax advantages to business owners, the fine print matters.
There is one neat and simple way to avoid this whole problem while preserving the benefits of having a 401(k) plan, and that’s by hiring a fiduciary firm that can greatly reduce the risk exposure to the owners.
There’s a lot going on under the hood of any given retirement plan. Administration, safeguarding the money, choosing investments and more. I tell many of my clients, “Look, I don’t know much about your particular business, but I do know about this stuff, and it’s my job to break down the fine print and help you minimize unnecessary risk.”
If you own a business, large or small, you likely already have liability insurance to protect your company and your own assets. Reducing your liability in your 401(k) is no less important, and it gets by many small business owners until far too late.
