Ameriprise Financial recently coughed up $27.5 million to settle the kind of lawsuit that no employer wishes ever to have — one brought by its own employees. The suit, representing 24,000 current and former employees, charged Ameriprise executives with a breach of fiduciary duty and unreasonable fees. This provides several insights for investors and employers. You’ll find no better evidence of the conflicts of interest facing broker dealers than this situation where the company that bills itself as “America’s leader in financial planning” is ill-serving its own employees.
Avoid Expensive Funds
401(k) plans are notorious for holding expensive funds that do more to pay the broker who installed the plan than they do to help the retirees seeking financial freedom. The highest costs usually hit the smallest companies, which is why it is especially alarming when a large company offers suboptimal funds. The Ameriprise suit accused the company of stuffing its 401(k) plan with expensive and underperforming funds that were operated by an affiliated investment management company.
The plaintiffs’ complaint shows at the time that Ameriprise 401(k) investments were selected, Vanguard and Fidelity were the two largest target date families with average expense ratios of 0.2% and 0.76% respectively. Instead, Ameriprise selected an affiliated company, Riversource (now Columbia) target date funds, with average fees over 0.9%.
Unless the fund managers agree to also do your laundry, you should avoid investments that charge anywhere close to 1%.
Employers Have a Duty to Review 401(k) Plans Regularly
Not only should employers review their investment expenses, they also should review their record keeping and compliance expenses. The plaintiffs’ complaint also accused Ameriprise of using an expensive record keeper from an affiliated company which was charging excessive amounts. Plan fiduciaries are required by law to ensure that these expenses are reasonable.
Employers should have a process to compare plan expenses to the average. Retirement advisors can help you do this using industry benchmarking studies which break down plans based on asset size and number of participants. If your plan is over $10 million in assets, you may decide to use a request for proposal (RFP) process to ensure you are receiving the most competitive bids. Alternatively, you can ignore this advice, but please make sure to purchase as much fiduciary liability insurance as your insurer will allow.
Buyer Beware When Dealing With Brokers
When establishing a retirement plan, you should find a fee-only fiduciary advisor — a professional who is legally required to serve your best interests. If you’re working with your insurance agent or anyone else that will not put in writing that they are a fiduciary advisor, you are working with a broker.
Scott Stringer, New York City Comptroller and investor advocate, recently proposed a new state law to ensure that clients understand the difference between a broker and a fiduciary. This new law would require brokers to make the following disclosure both orally and in writing:
I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected return for you.
It’s hard to have too much sympathy for the plaintiffs (Ameriprise employees). While they have won a victory to reclaim some of their lost retirement savings, plenty of Americans continue to suffer the consequences of equally expensive funds that continue to be proffered by this same company and others like it. When you work for a sales company, why would you expect that you would be treated any differently than your clients?
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