Mutual Fund ERISA: By Law, You're in the Driver's Seat

Dallas, TXIt seems like a nice, little cozy deal that on the surface promises convenience. Indeed, it seems to make just so much sense...you're a bank with a large employee base, with a large number of people enrolled in, and holding 401(k) retirement plans.

As a bank you also offer mutual funds, products you can also offer to your 401(k) plan holders. That way, your employees benefit from having your mutual funds in their plans, and you benefit from the associated fees earned from those mutual funds. Sweet deal. Sort of like cultivating your own customer base, right from your own backyard.

However, if you are a 401(k) plan investor holding mutual funds from your employer, you should bear in mind that there's an overall limit in the value of mutual funds banks are allowed to extend to their current, or former employers within the confines of a 401(k) plan.

The magic number is $30 million, according to the Institute of Fiduciary Studies (IFS). That's the total value of employer mutual funds invested in that same employer's 401(k) plan, a number that is in effect an aggregate of all participant assets.

That limit is there for a reason. Mutual funds, when compared to some other investments, tend to have some hefty management fees, load fees and other charges. The limit is in place in order to cut investors a break when the aggregated figure reaches a certain limit—in this instance, $30 million—after which investors have the right to negotiate lower fees with fund managers.

However, it has been reported that this often does not happen. Some of the larger banks and lenders have as many as hundreds of millions of dollars sitting in their own employee 401(k) plans without having negotiated lower fees, which amounts to not only a huge conflict of interest, but also a potential breach in fiduciary duties on the part of fund managers who could have quite easily, with the in-house fund limit of $30 million dollars having already been reached, invested employee money in other products that command lower fees.

For a fund manager to continue to invest their 401(k) plan into their own product beyond the $30 million aggregate limit, all the while propping up the bank's own mutual fund and raking in the fees, it could easily be interpreted as a breach in fiduciary duty.

For that matter, not listening to your client is also a breach, according to a Supreme Court ruling made last month in the case of LaRue v. DeWolff, Boberg & Associates, Inc.
The dispute centered on investor James LaRue, and the failure of his fund administrators to manage his portfolio according to his explicit instructions.

The resulting $150,000 loss in value that LaRue argued could have been avoided were his instructions followed, provided fodder for the Supreme Court ruling, which agreed on February 20th that LaRue has, indeed, the right to sue for damages in such a case according to the provisions of the Employee Retirement Income Security Act (ERISA) as amended in 1974.

ERISA statutes provide that the first loyalty that fund managers and administrators have is to the investor, and not their own interests.

You can see how this can be so easily breached, given the plethora of fees, bonuses and other perks available. A fund manager could be forgiven for wanting to buttress his own bank account by running up the orders on a particular product which may not be in the best interest of the investor—indeed, might even be against her expressed wishes—but hey, it means additional dollars in the pocket of the manager.

Or the big bank, ensuring a continuing market for its own mutual funds, and the fees that go along with them, by continuing to invest its own 401(k) plan into its own investment products beyond the $30 million aggregate limit deemed appropriate by the IFS.

And of course, a company that continues to invest its 401(k) plan into its own stock when the company isn't doing so well, is the kind of thing that ERISA was brought into existence to protect against.

In the end it's your money, and your retirement. By investing your money into a company-sponsored 401(k), the sponsor and the managers and administrators are required by law to invest prudently, and manage your portfolio with your best interest as Job One. The ERISA statutes exist to protect you from managers and even entire institutions motivated by greed, and the February 20th Supreme Court decision regarding to LaRue case upholds the right of an individual to sue for damages over losses incurred as a direct result of the mismanagement, greed, or blatant disregard for your wishes and your best interests on the part of those charged with managing your money, and assuring your retirement.

In the end, they are required by law to help grow your money...not steal it.