There are a litany of laws protecting participants from fraud that have helped victims recover their money, but these laws only deal with theft. Fraud can still occur in the absence of outright theft in the form of mere misappropriation of assets, which is a form of embezzlement, defined by the Cornell Law School Legal Information Institute as:
“The fraudulent taking of personal property by someone to whom it was entrusted. It is most often associated with the misappropriation of money. Embezzlement can occur regardless of whether the defendant keeps the personal property or transfers it to a third party“.
And here is the part of the definition of misappropriation that could apply because so few plan sponsors understand participant fees based on thousands of conversations I’ve had with them.
“Obtaining property or services offered for sale or compensation by means of deception or a statement of past, present or future fact that is instrumental in causing the wrongful transfer of property or services, or using stolen, forged, expired, revoked or fraudulently obtained credit cards or paying with negotiable paper on which payment is refused.”
More specifically, I have documented many instances where financial advisors receive significant and increasing annual compensation despite not providing any services at all and where plan sponsors pay record keepers and administrators increasing annual compensation without knowing they can negotiate or how to effectively compare their services to other comparable providers. These actions demonstrate a failure to meet the reasonable person standard:
“The so-called reasonable person in the law of negligence focuses on how a typical person, with ordinary prudence, would act in certain circumstances. The test as to whether an individual has acted as a reasonable person is an objective one, and so it doesn’t take into account the specific abilities of a defendant. Thus, even a person who has low intelligence or is chronically careless is held to the same standard as a more careful person or a person of higher intelligence.”
However, sometimes plan sponsors bear responsibility for excessive participant fees. For example, the plan sponsor often has a relationship with the financial advisor which results in not sufficiently scrutinizing the advisor’s compensation and comparing with other providers to ensure reasonableness. And plan sponsors often choose not to review service provider fees because their bottom line isn’t affected and they don’t want to spend the time. In the end, it’s always the plan participants who pay the price.
This type of financial abuse primarily occurs in smaller plans that the DOL lacks the resources to focus on and litigation firms don’t care about because pursuing legal action isn’t profitable. So it’s ultimately up to participants to expose these practices. See my previous post if you want to know how you can take action.