Thursday, February 26, 2009

Poor Employer-Sponsored Retirement Plans

In an effort to cut costs, employers are looking for cheaper alternatives in their benefits packages. “You get what you pay for” is very often true when it comes to retirement plan administrative services. Those with the best plan options probably charge some of the highest fees. Yet if your employer sponsors a plan, you are generally ineligible for a personal Individual Retirement Account.

Which is worse, then? Not offering an employer-sponsored retirement plan to your employees such as a 401(k), 403(b) or Roth 401(k), or providing one that has poor investment options within it?

With new laws and SEC regulations in 2008, there are likely to be important court decisions over the rest of this year, especially on the topic of the employer's obligation to make decisions "prudently."

Is it a breach of duty to the employees if the employer switches to or continues to use a company that repeatedly trails the industry average in terms of performance? What if the company’s products are average or above, but the specific package of investment vehicles in the plan are sub-par? For a discussion about a recent court decision that implies potential liability of employers as "functional fiduciaries" based on the employer's role in selecting the investment products available to employees, see Jamie Laplante's post.

Beyond the legal liability issues, I assert that there is a significant morale boost when an employer displays diligence in helping its employees plan and invest wisely for their retirement. Higher morale means happier employees and we know that generally means more satisfied customers. Employers should minimize their exposure by making prudent decisions about the plans and products available within sponsored plans both from a pro-employee perspective (i.e., what they would want for their own money) and from a risk management perspective (i.e., is the savings worth the exposure to employee lawsuits and adverse publicity?).

For a good discussion of steps employers can take to minimize exposure in this area, see Dodd S. Griffin's discussion.

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