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When 401(k) Holders Can Sue

When 401(k) Holders Can Sue

The Supreme Court has ruled that 401(k) retirement account holders can sue plan administrators for mismanaging their money. The court unanimously ruled yesterday that
a Texas man, James LaRue, could take his former employer to court over $150,000 he says he lost when his investment instructions were not followed. The decision
doesn't guarantee that account holders will win their money back, but it clarified their right to try. U.S. News spoke with Mary Ellen Signorille, senior attorney for AARP's
litigation unit, about what account holders need to know. Excerpts:

What does this ruling mean for 401(k) holders?

Most people, if you had asked them before this case came out, would have assumed they could sue to recover their plan assets if the plan trustees did something wrong
and their account balance went down. Unfortunately, the lower courts had not taken that view. The takeaway from this [ruling] is now there is a way to sue your plan fiduciary
if you believe they have done something wrong that negatively affects your account balance.

What if you just don't like the plan options offered?

You won't have the right to sue over that unless you can show a breach in fiduciary duty, which means they didn't look at a variety of plan options or picked the most expensive. It
would have to be something that was a breach of fiduciary duty, not just "I wanted this, and they didn't put it in."

So what would be enough to justify suing?

If you give investment instructions and they are not followed, that is clearly a situation where if there is a loss, you can sue to recover it. Let's assume that your plan has employer stock, like in Enron and WorldCom, where plan fiduciaries didn't look to see whether that is still a prudent investment. That would be something. Or if they don't look at the fees and the mutual funds are the most expensive that they could pick, that would be grounds for a lawsuit. It is a bigger-picture thing where there could be a breach of fiduciary duty if trustees don't prudently do due diligence, or they don't have procedures in place to make sure your investment instructions are followed.

Could you sue if your fund performed badly?

That gets into a gray area. I would say that in itself, without anything more, it is probably not enough, but, for example, assume your plan puts [money] in various investment options and then doesn't monitor it for five years. That may be enough for a lawsuit. There is a duty of your plan fiduciaries to monitor how your plan options are doing over time.... If they don't do any review, they've got a problem.

Will this lawsuit cause plan managers to be more careful about how they are running 401(k)'s?

I think fiduciaries always try to be careful. It made a lot of fiduciaries go back and look at the procedures and processes that they have to make sure they are working and to make sure individuals know what they are supposed to do. It's a matter of disclosure and notice. So it probably has a positive effect.

RECORD KEEPERS:

The battle for the very large and very small market is over unless fee disclosure causes mass exodus from insurance companies in the smaller markets. Large market providers are being bled to death on costs while big name small market record keepers have to move up market to maintain asset growth as the plan change rate grinds to a halt. Providers with mature TRO businesses are more secure than pure DC record keepers. Consolidation will only happen if acquirers are willing to over-pay. Everyone is worried about the "Great West" factor, or whether someone has truly figured out how to do things cheaper or if they are just buying market share. Open architecture providers like CPI, Newport, Daily Access, RSM McGladrey, BPA, plus hundreds of smaller ones will continue to grow, but most are too small to matter with the exception of Ascensus. Can the industry sustain the current cost of wholesaling as price pressure only gets worse?

SPONSORS:

With unemployment and cost cutting expected to continue, do not look for sponsors to splurge on benefits - especially retirement plans. Sponsors want nothing: no cost, no work, and no liability. As administrative staffs diminish and companies stay focused on their core businesses, do not expect record keeper change to rise above 4%, as it will more likely stay below 3%. Of course, advisors who deliver "nothing", especially less risk of fiduciary liability with participant lawsuits looming, will be in hot demand, more so if they can also help better prepare participants for retirement. Will sponsors wake up to the hidden costs in DC plans? Will they care?

ADVISORS:

It has never been so good to be a "Master" or "PhD" retirement advisor (those with more than 25 plans or $100 million under management), but it has never been as challenging. While most experienced advisors have doubled their books over the last 24 months, advisors not necessarily savvy in business management have had to struggle with lower revenue, higher costs, increased staff, little or no access to capital, and evaporating exit strategies. Those advisors that have weathered the storm and have learned the hard lessons will be that much stronger. Those that figure out how to capture rollovers and secure other benefit and executive comp mandates will rise to the top. Will the expected influx of new advisors looking to tap the systematic increasing flow of money in DC plans challenge the old guard?

BROKER DEALERS:

Look for the specialty groups like 401(k)Advisors/RPAG, CapTrust, NRP, and SageView to thrive as the Master and PhD advisors want more supportive homes. While the demise of the wire-houses has been greatly exaggerated, their advantages are diminishing as is their focus. The independents allow retirement advisors to do their business with little meddling or support. The move to pure RIA status will grow and would be even greater if any of the major platforms had a clue about how to support retirement advisors. The elusive holy grail of rollovers and gaining access to the mass affluent in DC plans will generate interest from the large indies and wire-houses, but will it garner resources and focus?

RECORD KEEPERS:

The battle for the very large and very small market is over unless fee disclosure causes mass exodus from insurance companies in the smaller markets. Large market providers are being bled to death on costs while big name small market record keepers have to move up market to maintain asset growth as the plan change rate grinds to a halt. Providers with mature TRO businesses are more secure than pure DC record keepers. Consolidation will only happen if acquirers are willing to over-pay. Everyone is worried about the "Great West" factor, or whether someone has truly figured out how to do things cheaper or if they are just buying market share. Open architecture providers like CPI, Newport, Daily Access, RSM McGladrey, BPA, plus hundreds of smaller ones will continue to grow, but most are too small to matter with the exception of Ascensus. Can the industry sustain the current cost of wholesaling as price pressure only gets worse?

DEFINED CONTRIBUTION INVESTMENT ONLY

Those with platform placement, significant assets, the right share classes, good performance, and distribution had a very Merry Christmas. DB managers, hedge funds, and mutual funds late to the dance have their noses up against the window, but all they are doing is fogging up the glass. Getting platform placement is harder than ever unless the right retirement advisors are advocating, which is even harder. A new wholesaling force focused on DC advisors is not in many budgets and getting data to properly compensate retail wholesalers is still close to impossible. Target date and asset allocation funds account for over 50% of flow, but the days of proprietary models are numbered. Will ETF's become significant and will collective trusts move down market?

TPA'S

Look for significant consolidation in the TPA market, especially for record keeping administrators who struggle with distribution and have less ability than ever to get capital to grow or invest in technology. Is anyone brave enough to try another roll-up? NIM is buying compliance-only TPA's, but capital is scarce and margins are thin. The unbundled TPA service model in the small and micro markets will continue to gain market share, but there is room for newer national record keepers to take share as incumbents struggle with re-pricing. Will the TPA unbundled, group annuity model play up market?


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