Saturday, December 24, 2011

When Will the Wall Street Firm Abuse End?

If this is not proof of a Wall Street firm's shenanigans, then I do not know what is. Wal-Mart Stores, Inc. was sued in the U.S. District Court for the Western District of Missouri over Wal-Mart and certain employees who allegedly violated their fiduciary duties by selecting retail mutual funds as investment options, rather than lower fee institutional class funds. In addition, it was alleged that these same defendants breached their fiduciary duties by failing to disclose certain fund expense and revenue sharing information. In layman's terms, this means that the mutual funds being sold to Wal-Mart employees were loaded with 12b-1 fees that paid the Wall Street firm and its advisors excessive trail commissions.

Unfortunately, today there are a ton of 401(k) and Profit Sharing Plans that do this very same thing. This is your wake up call if you own a business. You cannot do these kind of shenanigans any longer. Every attorney in the country will take notice of this case and brother you better believe it when I say they will be looking at every 401(k) and Profit Sharing Plan that they can find to see similar violations of fiduciary duties. If you have yet to be sued over your 401(k) and Profit Sharing Plan, then get ready. The litigators will find you. All 401(k) and Profit Sharing Plan information is publicly available to anyone. All they have to do is look up your 5500 forms on

If you are a business owner with a 401(k) and Profit Sharing Plan, or 403(b) or 457 Plan, then you better take notice of what I am saying here today. Good practices include:

  • Retaining an investment consultant who can acknowledge ERISA fiduciary status in writing and that this investment consultant be reviewed annually for conflicts of interest;
  • You should make available web-based investment education resources to Plan participants;
  • You should eliminate any investment options that include mutual funds that pay 12b-1 fees, and funds that provide revenue sharing or similar fees to any party at interest, including the Plan's trustee or recordkeeper;
  • You should consider adding passively managed funds as investment options; and
  • You should comply with the Department of Labor's participant disclosure regulations.
There are more important issues than those mentioned here, but this is a good start.

When I was the Branch Manager for Charles Schwab several years ago, I had a retirement plan guy come in to talk to me and my team. He told us how wonderful his firm was and how they could put all these really good mutual funds in the 401(k)'s that they wanted to be the third party administrator on. I asked him how much it costs and he told me that it was all taken care of with revenue sharing and 12b-1 mutual funds. The guy never would tell me or disclose his fiduciary duty to me and my team. This is how these Wall Street types sold the 401(k). They would tell the employer that it "doesn't cost you a thing. It is all internal to the funds." In other words, screw the employees. I never did business with him, because I knew that what they were doing was a clear breach of fiduciary duty. Looks like it is business as usual some eight years later. Nothing much has changed, especially when you have a Wall Street firm in the mix.

If you are a business owner and want to talk about how to protect yourself from breaching your fiduciary duty, then give me a call. If I cannot help you, then I will refer you to someone who can. I promise you it will not be a Wall Street firm.