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DEAR EMPLOYER, OUR MENU MATTERS
Is a 401( k) investment menu any different from a restaurant menu?
By Bryan Sanford
A restaurant owner spends time to conceive the perfect menu for its customers, so should the employer for its employees. Any restaurant owner knows the menu is a reflection of the passion and quality of their establishment. The menu items are carefully considered based upon customer desires, quality of ingredients, and most importantly cost.
Why should a 401(k) investment menu be regarded any differently?
After all, the purpose of a 401(k) plan is to help employees save for retirement. The investment options listed in the menu should help them do just that. The employer has the responsibility to carefully create a menu of funds appropriate for its employees. Many factors should be considered, but above all are quality and cost. The restaurant designs its menu for the customer and the employer designs its menu for the employee.
Would a restaurant be successful if its menu was expensive and lacking quality ingredients?
I am amazed at how many company 401(k) investment menus I see come across my desk which would be complete failures if they were a restaurant menu. Potential customers would be so outraged at the cost and quality of the menu options they would never eat there. Furthermore, in today’s social society, people would flood the internet with negative reviews and ultimately drive away all potential business.
So let’s call this the restaurant menu test.
Pretend that the options in your 401(k) menu are entrees on a restaurant menu. Would a customer order that dish? What is it made of? How much does it cost?
Unfortunately, there are many 401(k) menus out there that are failing the restaurant menu test. Moreover, it is not as easy for an employee to choose a different 401(k) plan because theirs is unfavorable as it is for a patron to eat at another restaurant because a menu is unfavorable. So what’s left for them to do? Well, the employees participating in these plans are taking legal action against their employers. The companies in charge of these plans are now being held accountable. There have been a flood of 401(k) lawsuits in recent years as participants become more aware.
JUST TO NAME A FEW
Tibble v. Edison
“The nine justices will consider a lawsuit filed by Glenn Tibble and other employees against Edison subsidiary Southern California Edison Company. The plaintiffs say the company breached its fiduciary duty by, among other things, offering higher-cost mutual funds to those participating in the plan despite the fact that identical lower-cost mutual funds were available.” – Reuters
Tussey v. ABB Inc.
“ABB Inc. and managers of its Personal Retirement Investment and Savings Management (Prism) plans failed to control record-keeping fees and didn’t pursue rebates, for which U.S. District Judge Nanette K. Laughrey in Kansas City, Missouri, found them liable for $13.4 million.” – Bloomberg
Bilewicz v. Fidelity Investments
“Fidelity agreed to pay $12 million to settle the class-action suits, which alleged that the firm was profiting at the expense of its workers by offering high-cost fund options and charging excessive fees for a plan of its size.” -CNN
Krueger v. Ameriprise Financial
“The plaintiffs contend that Ameriprise chose to offer the costlier R4 share class of its RiverSource funds when it could’ve used the cheaper R5 share class. They claim the costlier share class added 25 basis points in costs for “plan administrative services” and a service fee of up to 10 basis points.” – Investment News
Abbott et al v. Lockheed Martin Corp et al
“Lockheed Martin Corp. will pay $62 million to settle a civil lawsuit that claimed its employee 401(k) retirement plan charged participants excessive fees.” – WSJ
Notice a theme here? Excessive fees! It is becoming abundantly clear that employers are expected to have a responsibility to monitor their plan and offer funds at a reasonable cost. Remember, 401(k) menus are not set in stone, as the options can be changed, especially when there may be a less expensive option available.
Do the restaurant menu test on your 401(k) plan. If there are menu options that you don’t want then have them removed and replaced. Simple as that.