Video"They're beautifully designed for the post-2008 world where perfect clarity on fees and costs, and where money is going, are important," says Michael Case Smith of Avatar Associates, a New York–based firm that manages about $250 million in defined-contribution assets. "When you buy an ETF, it's just like buying a stock — here's the cost, here's the commission. There are not a lot of opaque or hidden fees." His firm invests exclusively in ETFs, bundling them into collective trusts to ease administration and minimize trading costs.
Fiduciary Liability
Anyone inclined to dismiss the fiduciary liability associated with offering a 401(k) plan should think back to a case settled by First Union Corp. in 2001. The bank, acquired that same year by Wachovia, agreed to pay $26 million to compensate participants in its own 401(k) plan. They had argued that First Union had harmed them by considering only its own investment funds for the plan and by charging excessive recordkeeping fees.
There has been a wave of similar class-action lawsuits filed since 2006. Initially focused on revenue-sharing abuses, some have since been amended to include complaints that plans acted improperly by offering actively managed mutual funds rather than index funds as investment options, or by offering mutual funds instead of generally less expensive separate accounts.
To be sure, there is no law against offering actively managed mutual funds, which still capture more investment dollars than index funds. But now more than ever, plan sponsors that do offer them must be prepared to defend their decision.
It really isn't time to retire the 401(k). But it is time to retire any lingering notion that plan design can be treated lightly. It is vital not only to the future retirement security of your employees, but also to your own goal of offering a good plan without putting you or your organization in fiduciary jeopardy.
Randy Myers is a contributing editor to CFO.
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