Point-Counterpoint: Should employers have a fiduciary duty to their 401(k) plans?
Two experts on retirement law square off on the question of fiduciary duty for 401(k) plan sponsors. One believes employers aren't best-suited for the responsibility, while the other believes the current system is OK.
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Dana M. Muir
Point
Our retirement system imposes too much potential liability on employers
Key points
• Employers don’t have expertise in determining appropriate plan investments, or hiring and overseeing third-party fiduciaries.
• Plan service providers and advisers have the expertise and are logical candidates to assume fiduciary responsibility.
• Fiduciary liability inhibits adoption of best practices developing in 401(k) plans because employers are risk-averse.
Fewer and fewer employers sponsor traditional pension plans, so the burden now is on individuals to save for retirement. Some employees do that through employer-sponsored plans, such as 401(k)s.
But too few employers, especially small employers, sponsor plans. In the plans that do exist, the variety of investment options can be confusing. Some employees choose investments with inappropriate levels of risk or pay unnecessarily high fees on those investments.
In part, both the deficit of plans and the challenges employees face can be traced to one fact: even though the retirement ecosystem has shifted, employers continue to face potential liability for investment-related decisions. An ideal retirement system would offload this responsibility from the employer.
When more employers sponsored traditional pensions, it made sense for employers to be plan fiduciaries, meaning, and most importantly, they had to make certain decisions with reasonable care and for the exclusive purpose of providing benefits. Employers were responsible for funding promised pension benefits so the employers’ interests in making investment decisions, such as balancing risk and return and maximizing value for cost from service providers, were aligned with those of employees.
This changed when 401(k)s became the predominant plan type. Employers have conflicts of interest with plan members in, for example, the selection of service providers. Employers who use plan service providers for other business matters may negotiate low fees for those matters while paying less attention to plan costs that are paid for by employees.
Most employers want to offer the best possible plan and investments to their employees, but many don’t have the expertise to determine what investment products are best for participants. They also don’t necessarily have the expertise or bandwidth to act as fiduciaries when hiring and overseeing financial industry service providers and advisers.
During the last 10 years, a number of lawsuits have been filed against employers alleging investments in their 401(k) plan menu have excessive fees or do not fully disclose information about fees. Potential fiduciary liability also inhibits adoption of best practices that are developing in 401(k) plans because employers are risk-averse in offering unusual investments.
If employers are protected from facing these types of liability, regulation still must play a role in assuring plan investment-related decisions, such as selection and oversight of plan menus, are made in the best interests of retirement savers. The logical candidates to assume that responsibility and liability are plan service providers and advisers who have the expertise to make those decisions.
The Department of Labor’s fiduciary rule, which President Trump has ordered the DOL to re-examine, would improve the situation by ensuring that members of the financial services industry that provide employers with advice would be responsible for that advice.
More extensive reform could be modeled after the Australian retirement savings system where investment providers have basically all of the legal responsibility and liability for offering appropriate investments. Employers have no liability for those investment-related products.
Dana M. Muir is the Robert L. Dixon Collegiate Professor of Business at the Stephen M. Ross School of Business at the University of Michigan.
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Jonathan Barry Forman
Counterpoint
Employers have an important role to play in our retirement system
Key points
• Third-party providers have their own biases (being more interested in their fees than in the well-being of participants).
• While employers’ interests can sometimes differ from those of workers, they generally care about employees.
• In the current political environment, the federal government won’t require employers to offer retirement plans or require workers to save through third-party providers.
Americans need to save for retirement, and employers have an important role to play.
While Social Security provides monthly cash benefits to 85% of elderly households, the average monthly benefit for a retired worker is just $1,360. If you want more than Social Security, you need to save for retirement—either on your own or through your employer.
Unfortunately, American workers are not required to save for retirement. In 2016, only 66% of private-sector workers had access to an employer-sponsored retirement plan, and just 49% of workers participated in those plans, according to the Bureau of Labor Statistics.
Workers can save for retirement on their own, but hardly any do. In 2015, just 11% of households made contributions to individual retirement accounts, according to Investment Company Institute data.
All in all, it is no surprise the Government Accountability Office finds 29% of households age 55 and older had no retirement savings in 2013.
If we were starting with a clean slate, we might not tie retirement savings to employers. Instead, we might require workers to save for retirement, and we might create third-party funds to manage those retirement savings. In the current political environment, however, the federal government is not going to require employers to offer pension plans, nor will it require workers to save for retirement through third-party providers. To be sure, Oregon, Connecticut, and a few other states may soon make employers offer retirement savings opportunities to their workers, but progress will be slow.
For better or worse, what we have now is an employment-based pension system, and that’s OK. Employers generally care about their workers and want to follow best practices.
Moreover, because there are economies of scale, employer-sponsored pension plans tend to have lower fees per participant than individual retirement accounts. And employer-sponsored plans usually offer better investments than individuals would otherwise choose.
While third-party providers could also achieve economies of scale, they have their own biases. In particular, third-party providers are more interested in their fees than they are in the well-being and retirement security of the participants they serve. While the interests of employers can sometimes differ from those of their workers, employers actually do think about what is best for their workers. Better the devil you know than the devil you don’t.
So, for now let’s concentrate on how to improve our employer-sponsored pension system. In particular, we should work to reduce the risk that plan sponsors will be sued for breaching their fiduciary duties. The U.S. Department of Labor should make it easier for employers to offer investment education and retirement planning advice to workers.
And Congress should make it easier for small employers to offer retirement plans. In particular, Congress should authorize multiple employer plans (MEPs) that could achieve economies of scale for groups of small employers and their workers.
Jonathan Barry Forman is the Alfred P. Murrah Professor of Law at the University of Oklahoma.
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