Growing up as a kid in the 70\u2019s and the 80\u2019s, there only seemed to be one variety of Tide detergent. These days, there seems to be a couple dozen varieties of Tide detergent with different fragrances and features. The same can be said of mutual funds. There are now 8,000 mutual funds out there with almost each mutual fund having an alphabet soup of share classes, with different fees and expenses. Larger mutual fund accounts are allowed to purchase a less expensive instutional class share of a specific mutual account, while a smaller account may have to purchase a retail class share of the same mutual funds with a larger expense ratio. While choosing any variety of Tide will get your clothes clean, choosing a mutual funds share class that is inappropriate for the size of your 401(k) plan may unknowingly subject you to potential liability.<\/p>\n
In the recent court decision in California Federal Court regarding Edison International\u2019s 401(k) Plan was a real eye opener when it held that the plan sponsor violated its fiduciary duty of prudence because it never asked whether a less expensive institutional share class of mutual fund was available for their plan.<\/p>\n
For example, I reviewed with a financial advisor, a retirement plan that is the largest client of a third party administration firm who also acts as the Plan\u2019s registered investment advisor. \u00a0A review of the fund lineup (someone actually posted their enrollment form online!) indicated that higher expense laden mutual fund share classes were being offered instead of institutional share type classes, which were available for a Plan of that size ($75 million). So even if the plan sponsor reviewed the mutual funds with the RIA on a consistent basis and did all the ERISA \u00a7404(c) homework, they still could be sued for a breach of the fiduciary standard of prudence because they never bothered to ask their RIA what less expensive share classes of mutual funds were available.<\/p>\n
So an extra duty for a plan sponsor is out there. It\u2019s not enough to determine whether the mutual funds in the Plan are appropriate for investment due to the Plan\u2019s investment policy statement, the plan sponsor also must ask about the fund share class. Usually, the plan\u2019s investment advisor will be knowledgeable and honest about the mutual fund share classes. If not, find a financial advisor that will be.<\/p>\n
Outside the 401(k) world, you can buy a product and pay more. In the 401(k) world, you may be liable if you pick a mutual fund and pay retail when you could have bought the same mutual fund at a discount. Once again, another item of concern for the 401(k) plan sponsor.<\/p>\n
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