Think You Control The Investments In Your 401(k)? Read This Horror Story

Think you control the investments in your 401(k) and are on the hook for any gains or losses? Well, you’re half right, anyway.  In certain circumstances your investments can be switched without your approval, but you’re still on the hook for the losses. That’s the disturbing lesson in a decision handed down last week by a three judge panel of the Sixth Circuit U.S. Court of Appeals. Here’s the story:  James C. Bidwell and Susan Wilson were long-time members of the emergency room flight crew at the University of Louisville’s Medical Center. Both participated in the not-for-profit hospital’s 403(b) plan —it’s like a 401k– and had consciously chosen to invest 100% of their savings in Lincoln National Corp.’s   Stable Value Fund, which guarantees return of principal and at least 3% interest a year. Until 2006, many employers, including the Medical Center, used such stable value funds as the “default” option for workers who didn’t pick their own investments, because they didn’t want liability if workers lost money. But in the Pension Protection Act of 2006, as part of an effort to boost the “automatic enrollment” of workers in retirement savings plans, Congress decided to protect employers from liability if they invest the savings of workers who neglect to pick their own investments in a “qualified default investment alternative” approved by the Department of Labor. In 2007, DOL named target date funds—but not stable value funds—as qualified default investments. Target funds hold a mix of stocks and bonds that gets more conservative (i.e. with fewer stocks) as a worker approaches his target retirement date. While target date funds  don’t guarantee principal, DOL decided they’re a better long term bet for workers, particularly young ones.  Noting that  some plan administrators might not know who had consciously invested in a stable value fund and who had previously ended up in one by default, DOL even allowed employers to switch both categories of workers and escape liability. On June 16, 2008, at the Medical Center’s behest, Lincoln Retirement Services Co. mailed letters to all 2,532 plan participants with 100% of their money in the stable value fund saying they would be switched into one of Lincoln’s LifeSpan (target date) funds in a month, unless they objected.  Both  Bidwelll and Wilson swore in affidavits that they open all their retirement plan mail and never got the notices, which were sent by regular first class mail. Both say they didn’t learn of the switch until they got their third quarter 2008 plan statements in mid-October. Disastrous timing. Between July 16^th and Oct. 15^th, the S&P 500 index had fallen 27%. “They opened the statements and both told me their mouths flew open. They were aghast at what had happened,” their attorney,  John Frith Stewart,  of Stewart, Roelandt, Craigmyle & Lynch in Crestwood, Kentucky, said in an interview. Both workers immediately called to switch their money back to the stable fund, but by that time Bidwell had lost $85,000 and Wilson $16,900.   The Medical Center plan administrator denied their requests to be made whole and both the district court and a three judge appeals panel agreed the hospital qualified for protection from  liability under the new safe harbor rules. Stewart argued, unsuccessfully, that DOL exceeded its authority in allowing plan participants who had chosen their own investments (instead of just those who were already in a default) to be switched. He also argued that even the DOL regulations require employees to be in “receipt” of a notice before an automatic switch–and there was evidence his clients never received a  notice.  “It doesn’t say `once a notice has been mailed’. It says ` receipt’,’’ Stewart complains.  Bidwell and Wilson haven’t yet decided whether they’ll ask for the case to be reheard en banc—that is by the full appeals court. One irony of this case, Stewart says, is “so many people will take an envelope (from their retirement plan) and toss it aside. But these clients were meticulous in their work and in checking their letters.” He notes that because the two were mostly worked outside the hospital, they didn’t get communications provided at work to other plan participants. “Somebody has changed the rules on you without you knowing it. That’s the horrendous part,’’ he says.Target Date Funds Devour Nation’s 401(k)s! Disney Or Hitchcock? Should You Trust Your Retirement To A Target Date Fund?