401k Lawsuit Denied by Federal Judge


This month, the authors of our Monthly Newsletter shed additional light on the gender pay gap issue and the impact it has on women saving for retirement. Citing statistics from the US Department of Labor, women are more likely to work part-time jobs than men, and part-time jobs are far less likely to offer a 401k plan. I find this troubling. Why do we have a system that makes it so difficult for a part-time worker to save for retirement, yet so accessible for a full-time worker? Is the part-time working mom’s retirement less important than the full-time worker’s?

This is one of the many reasons that the 401k system is ripe for significant reform and should be done with an aim towards making 401k plans more widely available to all workers. Right now, a significant portion of the IRS regulations are designed to encourage business owners to make contributions on behalf of employees. This is without question a noble goal, but the way the regulations are currently written has resulted in many unintended consequences. I have witnessed firsthand many small business owners walk away from offering a 401k plan altogether once they are informed on the cost and the complexity that accompanies having to follow all the IRS rules. This needs to change. Our system should encourage business owners to offer 401k plans, not burden them with costs and administrative tasks. Even SIMPLE IRA plans, which require less administrative work than 401k’s, are still costly as the employer is required to contribute to the employees account at either 2% or 3% of the employees salary. Unfortunately, many small businesses do not have bank accounts flush with cash to assume such risk. Considering that small businesses are such a significant part of the American economy, you would think there would be more urgency to address the fact that 67% of Americans are not contributing to 401k plans. Reforming the 401k regulations with an aim towards making 401k plans more widely accessible to all American workers would without question increase retirement savings, especially for the part-time working mother.

Many Fidelity 401k Plans may be in Violation of New DOL Fiduciary Rule

According to a report, Fidelity, the largest 401k provider in the country, will now act as a plan level investment fiduciary to certain 401k plans. However, many advisors feel as though Fidelity has an inherent conflict of interest in acting in this capacity which may expose plan sponsors to a violation of the new DOL Fiduciary rule. The new DOL regulation aims to reduce/eliminate conflicts of interest in providing investment advice to retirement investors.

Here is where the potential problem lies. Fidelity offers an “open architecture” 401k platform, which allows Fidelity funds and non-Fidelity funds to be utilized as plan investments. With Fidelity offering hundreds of their own proprietary mutual fund products, logic suggests it will be difficult for Fidelity to be unbiased when determining whether a Fidelity or non-Fidelity fund is in the plan’s best interest. Many advisors think this is a poor business practice for Fidelity to roll out, as it may confuse plan sponsors into thinking that they are exposed to less risk than they are, and potentially result in Fidelity not serving their clients best interest. At the very least, Fidelity may have just created an appearance of a conflict of interest, which could be problematic.

The fiduciary investment advice which Fidelity will provide will only occur at a “point in time” (at plan set-up) and they will NOT be providing on-going monitoring of plan investments, which will be a duty left to plan sponsors.

Another 401k Lawsuit Denied by Federal Court

(Source) – A federal judge has for the second time dismissed a lawsuit seeking class action status alleging that Chevron’s retirement plan overpaid Vanguard in recordkeeping fees.

The claim, brought last year by Schlichter, Bogard & Denton, asserted that the $19 billion plan violated the Employee Retirement Income Security Act in part by paying Vanguard asset-based recordkeeping fees rather than a consistent, per-account charge and by failing to put the contract out to bid.

Oakland, Calif., federal court Judge Phyllis Hamilton granted Chevron’s motion to dismiss in August for lack of evidence, but she left the door open to the plaintiffs’ amending the complaint. The plaintiffs did subsequently refile, and in a decision last week Hamilton dismissed the claims again — this time “with prejudice,” meaning they cannot be refiled. Click here for the full article. 

Our take – Not often do you hear the words excessive fees and Vanguard in the same story, but despite setting the industry standard for low cost investments, Vanguard is compensated quite handsomely to gain access to their 401k record keeping platform. However, and fortunately, charging a fee for a service is not against the law and the court acted accordingly.

New DOL Rule Requires Financial Advisers to Act in Client’s Best Interest

(Source) – The Secretary of Labor reaffirmed that the fiduciary rule will begin to phase in on June 9. The new definitions of who is a fiduciary will go into effect along with the impartial conduct standards on June 9–60 days later than originally planned….This means that on June 9, IRA advisors and others will be expected to provide advice that is in retirement investors’ best interests, charge no more than reasonable compensation, and avoid misleading statements. Click here for the full article. 

Our take – Ever since Lighthouse Capital opened in 2012, we have utilized a business model that puts our financial advisers in a position to work in our client’s best interest. To be candid, we find it to be a black eye on our industry that there are many adviser’s currently operating without their client’s best interest in mind. If you are concerned that your financial adviser may not be working in your best interest, contact us at [email protected].

401k Lawsuit Denied by Federal Judge

Summary: Last Thursday, a federal district court judge in Minnesota dismissed a class-action lawsuit brought forth by participants in the Wells Fargo 401k plan. The suit alleged that Wells Fargo breached their fiduciary duty by including their own Wells Fargo target date funds in the plan. Central to the plaintiff’s argument was that Fidelity and Vanguard offered lower cost and better performing funds in comparison to the Wells Fargo funds. However, the court disagreed with the plaintiffs assertion that the mere existence of less expensive and better performing funds, without showing a flawed decision making process, was grounds for a 401k fiduciary breach lawsuit. In the 10 page decision issued by the court, Judge Doty stated, “[plaintiff] pleads no facts suggesting that the choice of affiliated funds was the result of flawed decision-making.” This decision is subject to appeal and could possibly be overturned by the United States Court of Appeals for the 8th Circuit.

Our take: Plan Sponsor’s may insulate themselves from 401k lawsuits by having a sound decision-making process for determining what funds should be included in their 401k. Having an independent investment adviser quarterback this process can be an inexpensive way to provide this value. Learn how we can help manage your 401k by contacting us at [email protected].