Would you Buy Your Employee a $150 Ham Sandwich?

February 15th, 2011
by Jonathan Leidy

“Of course not… That would be absurd,” is what most executives would likely carp at that suggestion. However, in the case of retirement plans, like 401(k)s and 403(b)s, that is exactly what many executives are unwittingly doing.

ERISA, the Employee Retirement Income Securities Act, requires that executives be mindful of the costs associated with their company retirement plans. Beyond the conscientiousness and oversight an individual would normally be expected to exercise when making business decisions, ERISA plan sponsors are fiduciaries and are thus held to a higher standard of care. Specifically, they must put the interests of the plan participants above those of their firm as well as those of any other vendor associated with the plan.

As an example, if a CFO goes to the cafeteria and buys a $150 ham sandwich, the purchase may be characterized as many things:  imprudent, extravagant, and even downright stupid. However, CFOs are people too, and are thus entitled to spend their hard-earned money any way they see fit.

On the other hand, if that same CFO were to offer to pick-up lunch for everyone in the office, he or she would be faced with a much different dilemma when approaching the register. For even though our CFO craves the ham sandwich that is slathered in truffle butter and sprinkled with gold flakes, he or she should be hard-pressed to justify spending other people’s money in that manner. Moreover, purchasing those sandwiches on behalf of his or her employees could very well be considered a breach of the CFO’s implied fiduciary duty to procure lunch at a reasonable price.

Making reasonable purchases with other people’s money may seem like a “no-brainer.” However, what if the cafeteria in our example above didn’t have any listed prices? Or worse, what if the stated price for a ham sandwich was only $1.50, while the other $148.50 was just automatically debited from your pre-tax pay?  In effect, this is what is happening across the country in retirement plans. What’s more, in our example the extra charge was actually for high-priced add-ons, like truffles and gold. But what if, when you returned to your desk to unwrap your costly comestible, you discovered it was nothing more than your average piece of Oscar Meyer stuffed between two slices of Wonder?

Some of the biggest companies in the United States have recently found out the hard way. Both Wal-Mart and Edison International have drawn intense fire for “buying retail,” when they were entitled to wholesale pricing. Edison was recently fined ~$370,000 for its poor purchasing habits (a decision that is currently being appealed), while Wal-Mart is in the middle of their own court battle in which plaintiffs are asking for $140 million.

Wal-Mart executives claim that they had no idea the prices in the mess hall were that high. In response to their outcries, as well as those of many other plan sponsors and employees, the Department of Labor has introduced 408(b)2, or the Fee Disclosure Rules. Once in effect, any vendor that charges a plan in excess of $1,000 per year will be required to disclose all of their fees as well as to provide a description of the services rendered in exchange for those fees. Although the disclosure requirements are far from perfect, they should go a long way towards increasing the clarity around the true costs retirement plan participants are paying.

However, plan sponsors and their participants will be forced to wait a bit longer for their just “desserts.” This past week it was announced that the July 16th, 2011 deadline for 408(b)2 compliance of has been postponed until the beginning of 2012.

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