A sputtering economy and declining stock market have been taking a huge toll on investors’ portfolios, including employees’ 401(k) accounts. According to Fidelity Investments’ annual State of the 401(k) update, drops in the stock market resulted in the average workplace 401(k) account balance falling 27% in 2008. This drop occurred despite participant contribution levels that continued at slightly higher rates than in 2007.
Such losses can be frightening to any investor, but are likely to be particularly so to employees. For many 401(k) participants, their plan account represents their largest single asset outside their home and a primary expected source of retirement income, but also their only experience in stock market investing. Such high stakes, coupled with fear and inexperience, can be fodder for lawsuits, as employees look to recover losses. Although ERISA Sec. 404(c) can protect plan fiduciaries from liability for the consequences of participants’ investment decisions — if the provisions of that section are followed — fiduciaries continue to have the duty to act prudently and solely in the interest of plan participants when selecting the investment options offered by the plan and when selecting investment managers. Furthermore, both investment offerings and investment managers must be monitored to ensure that they continue to be prudent choices. With the 2008 U.S. Supreme Court case of LaRue v. DeWolff, Boberg & Associates permitting a plan participant to sue plan fiduciaries to recover individual losses alleged to be caused by a breach of fiduciary duty, an increasing number of lawsuits may be forthcoming, to test the extent of the ruling in that case.
Clearly, present-day circumstances should provide ample motivation for 401(k) plan sponsors to take steps to make sure they have adequately protected themselves in the event of a lawsuit by a plan participant. The following are among the issues to consider in conducting such a review:
- Investments. Review your plan’s investment line-up to determine whether the selection available to participants is appropriate. Does the line-up offer choices along the risk and return spectrum to all ages of participants? Are any pre-mixed funds based on age or expected retirement date appropriate for your employee population? If the plan includes a default investment for participants who have failed to direct the investment of contributions, review this option to ensure that it continues to be an appropriate choice. If your plan currently does not have a written investment policy in place, or does not use an independent outside consultant to assist in selecting and monitoring investments, take steps to incorporate these into your investment procedures.
- Fees. Determine the amount of current participant fees associated with your plan’s investments, and benchmark them against industry standards.
- Investment managers. Review — or create if you don’t already have them — the written processes you have in place for the selection and monitoring of investment managers.
- Administrator. The plan administrator is the face of the plan to employees. Solicit and monitor participant feedback on the administrator so that you know of any problems before they grow into headaches for you, or worse. Further, have criteria in place to assess the plan administrator’s performance on an ongoing basis and to benchmark performance against industry standards.
- Compliance. Are your plan’s administrative procedures in compliance with current regulations? If you intend your plan to be a participant-directed individual account plan, are all the provisions of ERISA Sec. 404(c) being followed?
- Communications. With the market changing so much over the past year, and the effect this will have had on participant accounts, it’s likely that communications that were appropriate during times of surging account values may not be so appropriate today. Revisit your plan communications materials and assess them accordingly. Saving for retirement remains vital to employees’ future financial security, but different messages may be needed to convey this, given today’s uncertain economy.