An employer who invested its employees’ 401(k) contributions in the retail class of mutual fund shares, which bore a higher expense load than the institutional class of shares, was found guilty of breaching its fiduciary duty to properly investigate the fund classes. The employer tried to defend itself by arguing that it relied on its professional investment advisor’s advice in selecting the retail share class, but the court said that wasn’t good enough. While relying on a professional advisor is evidence of having acted reasonably, the fact remained that had the employer investigated more thoroughly, they would have known that the institutional share class was available to their participants and that it would have yielded lower overall fees. The employer is now liable for damages, including the amount of excess fees plan participants paid, as well as the lost investment opportunity due to the higher fees (Tibble v. Edison Int’l, CD Cal, July 2010).
Tips: The U.S. Department of Labor recently published an interim final rule requiring 401(k) plan service providers to disclose fee and conflict of interest information to plan fiduciaries and sponsors to enable them to assess the reasonableness of the fees charged (75 Fed Reg 41600, July 16, 2010). The rule goes into effect on July 16, 2011. For more information, contact your retirement plan advisor.
