We’ve all experienced it – anyone who’s ever advised a 401(k) plan. There’s always one employee who knows it all. He’s the guy (and, yes, I’m not being sexist, but it usually is a guy) who thinks he could school Warren Buffet. He is, after all, the only person who believes some obscure fund with only $100,000 in assets is about to explode. It usually does, except not “explode” as in “ever higher growth,” but “explode” as in “blow up.”
Many times, a 401(k) plan sponsor will create a special “self-directed brokerage account” to appease these employees (who may, in fact, be owners or high level executives of the firm). These plan sponsors may be under the impression that giving these employees free range both solves the problem of their vociferousness and leaves the plan sponsor off the hook in terms of liability.
Nothing may be further from the truth, as revealed in “Is the Fiduciary Liability of Self-Directed Brokerage Options Too Great for 401(k) Plan Sponsors?” (FiduciaryNews.com, June 11, 2013).
Consider this: At what point is a fiduciary liable for enabling bad behavior? Most believe 404(c) fully absolves the plan sponsor of any fiduciary liability because it’s the employee’s responsibility to pick the investments. But what if one of the three “materially different” investment options includes a fund that always loses money because it treats every shareholder who invests more than $2,000 from their 401(k) every year to an all-expense paid trip to the Caribbean in February. Every employee will flock to that fund. It’s a losing fund, but it essentially bribes shareholders to stay in and contribute more. The only thing it guarantees is that no shareholder will ever reach their retirement goal.
Are 401(k) plan sponsors safe only because it’s the employee’s choice to invest in this fund? Or is the 401(k) plan sponsor guilty of offering a poor choice to employees? There’s a good chance it’s the latter because, in this case, the plan sponsor either failed to conduct proper due diligence or ignored the due diligence it did conduct. Either way, this is a bad thing and exposes the plan sponsor to a certain level of fiduciary liability.