Employers Face New Legal Threat from 401(k)s

L.A. Times reports today "High Court Allows Workers to Sue Over 401(K) Losses" . If you missed it you can dig it up from the Saving and Investing News Section of my website.

What does this mean? It may mean that a gaping liability has opened up for small and mid-size business owners that don't have the funds for high-powered attorneys to defend them against employees that are ticked off that the stock market often and predictably does go down.


I started in to this article with my curiosity piqued, turning to utter dismay as I plowed through. Seems that a Texas man had instructed his 401(k) administrator to move his stocks and mutual fund allocations toward bonds, and thereby hedging some protection from the stock market tumbling. Oops, the administrator dropped the ball and didn't get it done. Dumb---! A couple of months down in the stock market and $150,000 in retirement losses later, it was now the employer's job to mop up a very expensive mess, by order of the court.


Now definitely, somebody needs to be responsible for dropping the ball on this worker. You don't ignore trading orders. That's inexcusable. But look for what's missing in this report and you'll see the elephant in the drawing room. We don't know who the administrator was, and what their relationship was to the employer. Unless this was a rather unusual circumstance, the poor employer is getting nailed for what had been mishandled by the people whom he has hired and paid for their services to correctly and responsibly deal with administering the plan.


In most cases, the business owner just wants to provide a benefit to help their employees plan for retirement. He or she is running the construction company, or the tech services group, or the plant. Come one, they're not an investment consultant. No, they hire Oppenheimer, or American Funds, or someone like that to take care of all that for them and they pay fees for it. But typically, it's the group they hire that administrates the plans, not Joe Jones of Jones Construction.


So if Acme Financial Services fails to live up to their fees that Joe Jones pays, then Joe Jones deserves to be sued for it? What sense does that make? You might think it makes "deep pockets" sense, but I'm not even sure that's true. Most of the financial services giants are going to have a lot deeper pockets than Joe Jones.


The articles continues that "This opens the door to a variety of worker lawsuits, including challenges to the fees that workers are charged to administer their savings plans". Oh yeah, right - the owner pays the big fees for Acme to administer the plan, but gets sued for the fees that Acme charges the employees if they don't like them or don't read what they're signing.


Please get this - I'm not complaining that the workers have a right to sue someone for ignoring trading orders or hiding excessive fees. I have not one iota of disagreement with it. What I don't understand is why they are suing the employers who were also let down by the administrators, for the administrators' negligence.


So what's the take-away here? Well, first of all, you better understand that any Qualified Retirement Plan (SEP's, Simple IRAs, Profit Sharing Plans, etc) is going to carry the same liability to whatever develops from here. It's certainly not exclusive to 401(k)s.


Second of all, as the article mentions, being as this will make it easier for workers to be compensated for someone negligently screwing up their retirement plan, there's going to be a period of defining what qualifies for "screwing up", so to speak. And there will be a wave of court battles to expect for it.


But my take-away is more personal. For years I have been advocating that most business owners and key executives tend to have a completely different personal economy than the rank and file. As such, they begin with a tactical mistake in trying to fit their own retirement planning into a retirement plan designed by Congress to favor the rank and file - and set their future on a course for critical tax nightmares when they retire, and now add to that a whole heap of newly gained legal liabilities for the administrators they hire.


Retirement plans for the rank and file may not be the best choice for owners, officers and key executives. Fact is that there are a world of alternatives out there to reduce taxes and better leverage corporate wealth than a pedestrian Profit Sharing or 401(k) plan. I still don't get why they're so little known about.


Point is, if you want a benefit plan for your employees, get a Qualified Retirement Plan in place and just make sure to allocate just a little bit more to your legal defense fund ahead of time. But if you're starting with a plan for the boss, there may be better ways to go.