Would you change your 401(k) plan to retire five years earlier?

Of course you would. You look forward to the day that you can retire from work and spend more time with family, traveling, or recreating. Like you, millions of Americans depend on their 401(k) or other retirement plan to help them save enough for that retirement. Unfortunately, according to Congressional testimony, the wrong 401(k) plan can cause you to work an extra five years to receive the same retirement income.

The decision about the best 401(k) plan for your company is not based solely on total cost. Other factors are also important: fiduciary loyalty of the advisor, professionally-built investment portfolios, and ease of use.

Our 401(k) plans have 3 key objectives:

1. Reduce liability to plan trustees
2. Deliver excellent benefits to participants (at an acceptable cost)
3. Achieve true market rates of return

Unfortunately, most plans (probably including your plan) have:

• Excessive costs
  
• Vastly underperform the market
  
• Impose unnecessary liability on trustees
  
• Hidden fees that can reduce your plan assets by 50% or more!
  

Whether your plan has a $100 million balance or is a small company 401(k), all plans and trustees can benefit from understanding — and then avoiding — The 7 Deadly Sins of Retirement Plans.

Retirement plans are governed by federal law known as ERISA.

Under ERISA, retirement plan trustees have personal liability for breaches of fiduciary duty. Yes, this means that you can be sued individually.

On February 20, 2008 the Supreme Court ruled unanimously in LaRue v. DeWolff that plan participants can sue plan administrators for breaching their fiduciary duties. As a fiduciary, trustees are required to make decisions that are in the best interests of the plan participants, and are required to follow the Prudent Investor Act (1992). What may surprise most trustees is what the Act and its accompanying notes actually state:

“Fiduciaries and investors are confronted with evidence that efforts to ‘beat the market’ ordinarily promise little or no payoff, or even a negative payoff after expenses.”

Regarding active funds: “There will be new expenses of investigation and analysis, increases in general transaction costs, and additional risks such as may result from the judgment calls…They must then be taken into account, both in deciding whether to undertake an active investment strategy and in implementing that strategy.”

“The greater a trustee’s departure from one of the valid passive strategies, the greater is likely to be the burden of justification and also of continuous monitoring.”

To sum it up, your burden as trustee is higher if your plan uses active mutual funds. You have the burden to show that you appropriately considered the additional costs of active mutual funds when you placed those in the plan, and that those costs were reasonable for you to impose upon the employees. (After all, the employees ultimately bear the costs of overpriced mutual funds.)