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Dealers face increased retirement plan demands

Dealers who have gone the extra mile to offer a 401(k) plan to their employees now face potential long-term responsibilities because of a recent Supreme Court ruling.

In a decision last May that received little notice, the Court unanimously ruled that there is no statute of limitation on fiduciary responsibility for an employee’s 401(k) plan. Put another way, employers who sponsor retirement plans should meet with any of the plan’s advisers to make certain the investments in the plan have been prudently selected and regularly reviewed.

Specifically, the case involved a suit filed by employees and beneficiaries against a utility company. It claimed their employer had added some high-fee mutual funds to the 401(k) plan in 1999 when versions of the same funds with much lower fees were available to investors, but not offered in their 401(k) plan. The result, the employees contended, was their investment returns from the plan were reduced because they had to absorb higher fees than were necessary

The company’s position was that disputes like this had a six-year statute of limitations based on when the funds were put into the plan. Since the employees’ suit was filed in 2007, eight years after the fact, it was untimely. Interestingly, two lower courts agreed with the company.

But the Supreme Court reversed those decisions, essentially saying the fiduciary of an employer retirement plan has accountability in the same way as a trustee. It calls for far-sightedness in choosing investment options, examining them regularly and removing any eventually deemed to be ill-considered. Time was not a factor. “Care, skill, prudence and diligence” is how the Supreme Court described the employer’s responsibility.

As often happens, the Court didn’t actually rule on the substance of the employees’ allegation that the impact of the higher fees reduced returns. Regardless, the decision does make it clear the fiduciary responsibilities for the investment choices in a retirement plan offered to employees will last as long as the investment choices are offered.

Bottom line: Many dealers have 401(k) or similar retirement plans for their employees. It is, therefore, now more important than ever to regularly scrutinize what is being offered with an eye to fees and similar considerations.

Moreover, dealers with plans could do well to have serious discussions with financial advisers concerning: how many investments can be prudently offered; how to diligently select them for inclusion; and any possible ways to reduce the long-lasting liability the dealership could now be facing because of this ruling.

Yes, owning a small business today never gets easier, does it?

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