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High 401(k) fees? Your employer could be liable.

High fees in a 401(k) or other retirement plan aren’t just bad for employee participants. A recent Supreme Court ruling shows they can spell trouble for the employer, too.

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Jacob Turcotte/Staff/File
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Part of my work as a financial advisor includes helping small-business owners with retirement plans for employees. Recently I was chatting with the CEO and CFO of one such company about the savings I might be able to find regarding the 401(k) plan that my firm advises on. I assured them of my commitment to making sure their costs were more than fair and reasonable.

Then I told them about a conversation I had with an employee of another small business in Connecticut. This company is about twice the size of theirs and has twice the assets in its 401(k) plan. Going over investment choices with that company, I realized the costs of the funds in its plan were about one-third higher, which was disturbing. The advisor to this plan had been asleep at the wheel!

High fees in a plan aren’t just bad for employee participants. A recent Supreme Court ruling shows they can spell trouble for the employer, too.

The court ruled in May that current and former workers of a California-based energy company were owed a judgment of $370,732 for damages related to high fees, which were found in three of the 40 options included in the company’s retirement plan.

The Supreme Court opinion referred to the common law of trusts, “which provides that a trustee has a continuing duty — separate and apart from the duty to exercise prudence in selecting investments at the outset — to monitor, and remove imprudent, trust investments.”

The takeaway for business owners with retirement plans: Keep a close eye on your recommended fund lineups, and review your contracts with plan sponsors. Financial advisors must make sure that they are using suitable investments and that the costs of those investments continue to be fair and reasonable.

Small businesses and their plan sponsors need to be reviewing these things. If you started at a certain cost 10 years ago and the assets have increased, you need to pay attention to the fee structure.

In other words, simply “setting it and forgetting it” can get you in deep trouble.

The big picture for employers is that company-sponsored retirement plans are an important employee benefit and, aside from Social Security, often will be the only asset folks have to retire on. The Supreme Court has made it clear that businesses that offer 401(k) plans have a legal responsibility to make sure that the participants (their employees) are getting a fair shake.

And, if the financial advisor to the plan is in set-it-and-forget-it mode, as we saw in the example above, the business owner can end up in the legal crosshairs.

Had the advisor on the plan in the Supreme Court case known or cared enough to make the required changes, maybe that business would not be out more than $370,000.

Learn more about Daniel at NerdWallet’s Ask an Advisor.

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