If you have a 401(k) plan, their may be new straws in your milkshake

I drink your milkshake, I drink it up….

If you have a 401(K) plan there may be new straws in your milkshake

By Mark Allen Roberts 

In the movie There will be Blood, there is an intense scene in which the main character played by Daniel Day-Lewis shares ‘I have a milkshake and you have a milkshake, my straw reaches across into your milkshake and I drink your milkshake…Slurrrrrp “The milkshake in this example is oil. After seeing this scene it made me think of what is occurring with 401(K) plan participants now suing their past companies, plans, plan sponsors, all the trustees, and financial advisors and so on.

In a recent Supreme Court ruling, each 401(K) plan participant has been now handed a straw that reaches into the organization’s funds that would have been net profits and now may be required for legal defense and settlements of lawsuits. This ruling in LaRue vs. Dewolff Boberg and Associates affects more than 50 million employees with nearly $ 3 trillion invested in popular plans. This case that opened the straw dispenser began with an employee who allegedly realized $150,000 in claims due to losses from the consultancy firm failing to act on his instructions to shift his retirement savings when the stock market hit turbulence over six years ago. Every employer who offers a 401(k) plan must be aware there may be straws entering their corporate milkshakes and it is highly foreseeable they will only increase in the future. I can even envision commercials during episodes of Lost, something like  …” is your retirement funds less than what you thought it would be? Are you sure your company invested your retirement funds properly? Were there excessive fees in administering your plan? CALL 1-800-FOR- CASH. At Smith and Smith we get you more money for retirement” and then the smiling retired baby boomer couple ends the ad by saying “thank you Smith and Smith” and drive their golf cart off into the sunset.

 Last month we celebrated the first baby boomer entering retirement. This generation of baby boomers has characteristics, traits uniquely their own. One of which is they have no concerns with suing when they feel they have been wronged. Unlike past generations who may have chosen to handle issues one on one with the party who may have wronged them, this generation has matured hearing a media blitz of “ have you been in an accident, have you received a DUI, have you been exposed to asbestos….Call Feldman and Smith your personal injury attorneys…we fight for your rights.” The good news is there are a number of highly ethical firms that truly care for clients, and insure they receive equitable compensation for injury. However there will be firms that that are not so ethical resulting in more settlements than cases that climb the court steps. Another case has risen to gain the spotlight. In this case the type of pension plan is being challenged. Yet another case alleging the plan charged excessive fees. Another case…. And very quickly you too will feel the tide of litigation building momentum. Unfortunately there is nothing you can do to be absolutely insured you will not be sued. However there are some steps every company can do to reduce their risk.

This article does a great job of guiding companies with 401(K) plans how to reduce their risk of future lawsuits. Working in the pension industry it often shocks me how little CEO’s, CFO’s and trustees know of their corporate and personal risk in the administration of their plan. The first question to ask is; who is fiduciary of the plan? The definition of fiduciary is “Law. A person to whom property or power is entrusted for the benefit of another” Simply put who ultimately takes the responsibility that the plan is administered correctly, its fees are reasonable, and who owns the liability in the investment choices? Some large plan sponsors, with their teams of highly trained and experienced analyst offer to take this burden, this future risk from the corporation. What worries me most is the kind company owner who has done his best to invest employee pension funds, with the advice of a trusted advisor. If the advisor has not taken on the fiduciary responsibility, this kind owner who developed a pension plan years ago to take care of the people who helped him serve his clients is now at risk and may not even be aware.

So I dug a little deeper and found of the CEO and other C level employee’s survey 95% admitted they were unaware of the Pension Protection Act and how it may be affecting their business. A great resource is your local pension consulting firm, or www.dol.gov . The new Supreme Court ruling is even less known. To reduce your risk we highly recommend you work with a local pension consulting firm to assess your level of current risk and make recommendations. One way employers are reducing their risk is through Life cycle, Life style funds being added to their portfolio of investment choices. Others, as the result of the new auto enrollment feature of the PPA are defaulting participants into these funds.  Company owners are quickly finding out their level of exposure and are partnering with platforms and fund choices that take or reduce their future risk.

As high as 60% of plans that offer auto enrollment is now offering the funds. As you see the milkshake scene it ends with the lead character (a plan participant in my analogy) chasing his once trusted friend (his past employer). The character representing the company is shouting ‘we were friends…” and the scene ends with the lead character——-splitting the other characters head wide open with a bowling pin. Business is tough enough, and the challenges seem greater each year. Companies must quickly assess if their corporate profits are at risk from future litigation. Some will transfer the fiduciary liability as best they can. Some will be asleep until the loud “Slurrrp” of would be profits are drained though the long straws of the lawsuit fees and settlements.