Financial Opinion and Insights

401(k) Excessive Fee Cases are Alive and Well

The Independent Financial GroupJim Lorenzen, CFP®, AIF®

 The recent decision in Tussey v. ABB, the first full trial to consider whether fees in a large 401(k) plan were excessive, the defendants, ABB and Fidelity, were on the losing end and ordered to pay $36.9 million in damages.

I’m not an attorney; nor do I play one on t.v.; but, I’d say this sounds ominous.   Even so, the fiduciary duties of loyalty, prudence, and disclosure are not difficult to fulfill.  It’s certainly easier than spending time and money defending a lawsuit – something we’ll likely see more and more of as participants see the disclosures and learn, probably online, how to compare their plan to others out there.

Not only is there an increase in activism fueled in social media; but, increasingly, tools are becoming available that anyone can access.  Unfortunately, most employees participating in 401(k) plans simply do not have the educational background to utilize their plans wisely.  According to the Society of Actuaries’ 2011 Risks and Process of Retirement Survey (p.3), Americans’ financial literacy leaves much to be desired: “… inadequate math skills, their poor understanding of financial concepts such as compound interest, and their lack of basic comprehension of the functioning of investment markets.”

The same survey revealed that just one-third of pre-retirees (35%) say they have a plan for financing their retirement.

At a minimum, employees appear to need a wake-up call; and, given the average participant’s well-documented ineffective use of the 401(k) plan, you’d think that fiduciaries, acting as ‘prudent experts’ would be providing employees a personalized gap analysis; but, it appears most aren’t even doing this, despite the fact they know that few feel they’ll be financially prepared for retirement.

Most plan sponsors seem to cite retirement benefits cost and regulatory complexity as impediments, which seems to indicate that what’s important to them conflicts with their fiduciary duties… a dynamic which some regulators might arguably view a self-dealing, i.e., a prohibited transaction. 

When fiduciaries can’t document what they did and their rationale for doing it, this absence of a paper trail can provide strong evidence that they didn’t fulfill their duty of loyalty (exclusive benefit rule) or behave prudently.

They’re worth reviewing:

  • Exclusive Benefit Rule – The fiduciary “must discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of:  (i) providing benefits… and (ii) defraying reasonable expenses of administering the plan.” [29 U.S.C. §1104(a)(1)(A)
  • Prudent Man Rule – A fiduciary must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would…” [29 U.S.C. §1104(a)(1)(B)]

Those treating vendor paperwork as oversight have a right to question it’s objectivity and potential conflicts.



Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  Opinions expressed are those of the author.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.


Written by Jim Lorenzen, CFP®, AIF®

May 1, 2012 at 8:00 am