401(k) Litigation: The Dangers (and cost) of Letting the Fox Watch the Chickens

In a recent 401(k) litigation court case (Tussey v. ABB Inc.), an appeals court used a fantastic amount of common sense: ruling that it is the farmer’s (not the fox’s…) fault if the fox he allowed to watch his chickens eats his birds.

Capitalism, Common Sense, and 401(k) “Car Shopping”

In America we live in a capitalist economy where buyers have the ability to “shop around” in the free market to ensure they’re obtaining a fair cost.  Even moreso, in the context of 401(k) plans, regulations go a step further to require companies to determine if their plan costs are “reasonable” for the scope of services provided.

Analogy: can you fathom walking into a car dealership, where the salesperson suggests: buy this jalopy for $50,000, it’s a fair price, trust me, you don’t need to do a price check elsewhere.  No consumer in their right mind would do this in buying a car  –  it is simply common sense, right?

Yet so many companies do this all the time with respect to their 401(k) plans.  When an organization has a “direct” relationship with its 401(k) vendor (i.e., without any independent “watchdog” advocating on their behalf), they are likely to believe trust and buy from that car salesman without shopping around!

Perils of “Direct” 401(k) Vendor Relationships

The number of companies who believe that because they’re with __________ [insert name of any “direct” 401(k) provider] so “we’re good” is astounding.  After all, who is it that’s telling you “you’re good?”  Is it the 401(k) provider?  Gee, might they have incentive to tell you “you’re good” (even if you’re not)?

Taking their word for this is the same as taking the word of that car salesman who says you should pay $50,000 for a jalopy.

Do you think an un-policed 401(k) vendor would voluntarily divulge “hey, XYZ corporation, when you look at peer companies in the 401(k) marketplace, we’re actually over-charging  and/or  under-serving you  –  so you should think about firing us.”  Again, common sense tells us: that’s not going to happen, right?

Fidelity Exercises Its Capitalist Economy Rights

In the Tussey v. ABB case, ABB had a direct relationship with their 401(k) vendor (who happened to be Fidelity).  It was determined that Fidelity was over-charging them, but not by deception: their fees were disclosed  –  and ABB chose to pay them (rather than checking the reasonableness of said fees in the open market by doing an independently-driven vendor search  and/or  benchmarking analysis).

Fidelity exercised its right in the American economy to charge a high price to make a profit  –  and, at the same time, Fidelity bore the risk that its customer might price check & take their business elsewhere.  And, indeed, the court ruled that Fidelity had every right to charge more by absolving them of wrongdoing  –  whereas it was ABB who was culpable of letting the fox watch the chicken coop.

Too often companies try to save money by having these “direct” 401(k) vendor relationships (rather than hiring independence consultants).  But, to be clear, the Tussey v. ABB story (and cost!) is one that could have been avoided if ABB had engaged a good independent fee-based consultant.

This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor or plan provider.

Author: Ben Hall, ChFC, AIF®

VP & Managing Director – JKJ Retirement Services

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