The Impact on 401(k) plans by the recent U.S. Supreme Court Ruling

Written by: Martin Shields

A recent unanimous ruling by the U.S. Supreme Court stated that employers who have 401(k) plans have an ongoing duty to review the investments in their plan and remove any investments that are not prudent because of costs or performance. This ruling is both a benefit to participants and a warning to employers. For participants of 401(k) plans, this ruling provides them with additional support that their 401(k) plan needs to have investments that are performing well versus an appropriate benchmark and that they have reasonable annual expenses. Employees should be taking the time to review the investment options in their plan and voicing any concerns to their employer. For participants, it becomes extremely important that the fees and investment performance of the funds in the plan are within acceptable levels because both items can greatly impact the value of their 401(k) accounts over an extended period of time.

For employers who are sponsors of a 401(k) plan, this ruling helps to more clearly define their role and responsibility as a fiduciary on the plan. For most plan sponsors, they do not have the knowledge or expertise to make these decision so it can become a significant risk for them since they have personal liability with the plan. To help alleviate this responsibility for plan sponsors, the Department of Labor, which oversees 401(k) plans, allows plan sponsors to delegate this responsibility to an investment manager who takes on the role of fiduciary of the investments in the plan. This type of investment manager is called a 3(38) Investment Manager and they take over the fiduciary responsibility for monitoring and implementing all decisions regarding the investments in the plan. When utilizing a 3(38) investment manager, the plan sponsor still retains the responsibility to select and monitor the Investment Manager but all other investment decisions get assigned to the investment manager.

Please contact us if you have any questions regarding your 401(k) plan or if you would like to have a benchmark review of your 401(k) plan completed.