From Traditional Pension Plans to the 401k

It has been 36 years since the passage of ERISA (Employment Retirement Income Security Act) and as a result there has been a dramatic migration from traditional pension plans to 401k plans. This move to 401ks from traditional pensions has shifted the investment risk and savings obligations to Plan Participants (employees).  But what Plan Sponsors (companies that provide 401k plans to employees) don’t know is that the shift of investment risk and savings obligations to Plan Participants has not resulted in a change of legal responsibility. Recent regulatory changes stemming from the Frank-Dodd Act passed by Congress has actually expanded the definition of “Plan Fiduciary ” (Plan Sponsor).

As a result of recent regulation, Plan Sponsors will be required to know and understand all the fees both implicit and explicit within their 401k plans and also be required to begin disclosing these fees to all their Plan Participants. Even in a self-directed plan, it remains that the Plan Fiduciary (Plan Sponsor) has the ultimate legal responsibility to determine if plan fees are reasonable, regardless of who is making the investment decisions.

Cost drag of fees on 401k plans

401k Benchmarking

So how does a company (Plan Sponsor) find out whether the 401k plans fees are reasonable? In essence, Plan Sponsors must go thru the process of benchmarking their plan against other peer groups of the same size and similar industries in order to determine whether their existing plan fees are reasonable. Obviously, most companies do not have the resources or the technology to produce proper unbiased independent reports and demonstrate they went thru the correct benchmarking process. The best option for Plan Sponsors is to hire an independent 401k consultant to conduct the proper research and produce a detailed peer group and industry benchmark.

By not going thru a comprehensive benchmarking process, a Plan Sponsor runs the risk of not being in compliance with the Department of Labor’s ERISA requirement of Plan Fiduciary. Another significant potential threat is the Plan Sponsors cost of litigation from lawsuits brought on by the participants themselves when they discover the unreasonable fees in their 401k. Discovery of these fees by participants is only a matter of time since one of the new mandates is the requirement of Plan Sponsors to begin disclosing these very same fees by April 2012.

About Joshua E. Betancourt

Joshua E. Betancourt is a 401k consultant at Quantum Capital Investments (Q C I), an Independent Registered Investment Advisor specializing in helping businesses benchmark their 401k plan and bring their plan into compliance. Joshua also assists in providing businesses access to lower cost investment options within company 401k plans and conducts onsite financial education to business executives and plan participants. Joshua is also a Registered Investment Advisor and investment manager. QCI is a Full Service Investment Advisory and FINRA registered.

Joshua E. Betancourt

Quantum Capital Investments

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