Flurry of 401(k) suits over excessive fees have put employers on notice

Class-action lawyers are targeting a wider variety of alleged breaches of fiduciary duty in retirement offerings

Aug 19, 2016 @ 3:35 pm

By Bloomberg News

Employer anxiety about offering you a 401(k) plan is rising rapidly, and for potentially good — and expensive — reasons. Class-action lawyers are targeting a wider variety of alleged breaches of fiduciary duty in retirement offerings and suing a broader range of entities, including college and university 403(b) plans.

The latest burst of litigation came Wednesday by Schlichter Bogard & Denton, a law firm with a track record of wringing big settlements out of some of the nation's largest corporate 401(k) plans. The firm's new push into the nonprofit education world's version of 401(k)s includes litigation against Cornell University, Northwestern University, and the University of Southern California and similar cases against plans at Yale University, New York University, Duke University, and Vanderbilt University.

Your company may be worried. A new survey of small and midsize plans showed that 38% of them are concerned about the risk of being dragged into court, vs. 24% a year ago. Additionally, this year was the first time it came in as a top reason plan sponsors are turning to retirement advisers, according to the seventh annual Fidelity Investments Plan Sponsor Attitudes Study. The data on smaller plans, defined as ones with 25 to 2,500 participants, were culled from a larger study of 976 sponsors with as many as 10,000 participants.

The rise in employer fear means more people in 401(k)s may find their company adding a new adviser or moving to a different one. The number of companies looking to change advisers hit 23% in the study, a new high. Almost 70% of plans cited the willingness of an adviser to “take on a formal fiduciary role" as important. An adviser change may come in tandem with the winnowing of a confusing thicket of investment options and a switch to lower-priced versions of mutual funds.

Part of the push by employers to start using, or change, advisers is to improve plan performance. Some 88% of plan sponsors surveyed said they have employees who put off retirement because they haven't saved enough. That's obviously not ideal for older workers who want to ease out of the workforce. And as Fidelity Institutional's site phrases it: “Delaying retirement creates potentially higher costs for the sponsor and also may limit advancement opportunities for younger workers.”

There are a lot of fundamental reasons why employees don't save enough. (Student loans, anybody? Wage growth?) One reason is that many people just don't know how much they need to save, let alone how to get there. The study noted that 68% of companies “don't define clear savings or retirement income goals.” For an employee without a defined benefit pension plan, Fidelity says the percentage of preretirement income a worker should try to replace in retirement should be about 45% of an employee's final salary. To get there, most people need to amass 10 times their final salary by their full retirement age (as defined by Social Security) of 67, the study said. So someone making $150,000 needs a final nest egg of at least $1.5 million at age 67.3

One way companies can help savers reach that ambitious goal — aside from increasing the employer match, which is a big motivator for workers but pricey for employers — is to enroll participants automatically at a deferral rate of 6% of salary. The more typical rate is 3%. An American Century Investments survey of 1,504 workers in the year's first quarter found that some 70% of employees weren't averse to that — they thought a 6% rate was what employers should use in automatic enrollment. Automatic escalation of employee contributions of 1% a year until employees are deferring 15% of their salary, up to the allowed dollar limit ($18,000 for 2016), would also help, said Fidelity.

A push to improve retirement savings plans is all good. What's too bad is that much of the impetus behind the move isn't tied to a desire to do the right thing, but rather to a fear of being sued.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 02


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


What's the first thing advisers should do when they get home from a conference?

After attending a financial services conference, advisers can be overwhelmed by options, choices and tools. What's the first thing they should do when they get back to their office?

Latest news & opinion

8 apps advisers love for getting stuff done

Smartphone apps that advisers are using in 2018 to run their business more efficiently.

Galvin's DOL fiduciary rule enforcement triggers industry plea for court decision

Plaintiffs warned the Fifth Circuit that Massachusetts' move against Scottrade signaled that the partially implemented regulation can raise costs for financial firms.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

Gun violence hits investment strategies, sparks political debates with advisers

Screening out weapons companies has limited downside.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print