401(k) Lawsuits and the Democratization of Information

If knowledge is power then the democratization of information through technology is the most powerful and influential theme of our lifetimes. Once, knowledge was limited to professionals or those with extremely specialized training or education. Those days are long past.

Today anyone, not only medical professionals, can self diagnose themselves based on symptoms typed into WedMD - while, admittedly, this may cause some problems I would argue it is better to know than not know, hypochondriacs be damned. Similarly, instructions on how to build or fix just about anything can easily be found on YouTube and are no longer the private domain of experts and insiders. Ever increasingly the same can be said of investing.

Perhaps nowhere is this new power more visible than in the frenzy of lawsuits against 401(k) plan sponsors and plan providers - and increasingly small ones as well. Recently the furor of legal actions has even spread into the related 403(b) space with prominent universities like Duke, Vanderbilt, the University of Pennsylvania, MIT, NYU, Yale and Johns Hopkins all fielding lawsuits regarding excessive costs in their employer sponsors retirement plans.

According to research from RiXtrema the average retirement plan in the United States is wasting 44 basis points per year in purely excessive fees. Nearly half a percent! Per year! Each and every year! Over time that adds up to significant wealth lost. The same study goes on to say that many plans waste even more, often in excess of 1% annually - more than twice the average!

These lawsuits would not be happening if certain prerequisites were not met beforehand. First and foremost regulatory changes in the retirement plan space placed the onus of increased transparency on employers and plan providers. Now instead of opaque and confusing cost structures we have slightly less opacity - despite the best efforts of much of the financial services industry to continue to obfuscate the true cost of investing.

Additionally, the low yield environment and, by most accounts, a fully valued equity market has led investors to finally begin taking a greater interest in their own investment performance. When returns are 18% per year a half percent may not matter to most people, but when those same people approach or enter retirement that half percent a year, when safe yield is hard to come by, could be the difference between getting by and running out of money.

Lastly, lawyers took an interest. Law firms typically have better and lower cost retirement plans than most other industries according to BrightScope, a firm that itself has been instrumental in shedding light on the sometimes shadowy world of company sponsored retirement plans. Perhaps lawyers are better investors, perhaps they negotiated better terms or lower cost share classes with their providers or perhaps those same providers realized the potential for legal action under ERISA and decided to limit that risk by offering the legal eagles Cadillac plans.

Knowledge truly is power and the financial services industry for too long has been able to operate in a marketplace where that knowledge was hard to come by: pricing and services were essentially impossible to compare from provider to provider or even from one offering to another. No more. Consumers are wising up. Employers are asking better questions and regulators are finally cracking down with the recent conflict of interest ruling being just one example.

In a capitalist system we like to think that the cream rises to the top and competition allows the best to survive. This has not always been the case in the money management business - perhaps we are finally turning the corner. Knowledge is power, but knowledge without the application of it is wasted. Get informed: research your plan providers, consider plan costs, compare to other firms your size and in your industry.

Knowledge is power, but it is up to us to use it.