Why Is There a Lawsuit Against O’Reilly’s 401K Plan?
Incase you have not heard; O’Reilly’s had a lawsuit filed against them for breach of fiduciary duty. As a plan sponsor of the employees 401k plan, companies must act in the best interest of its participants. We are starting to see increased lawsuits filed for breach of fiduciary duty. No company is immune to it. Technology has gotten much more advanced; it is getting easier to scan form 5500’s filings from the DOL website using proprietary software. Anyone in the world can learn quickly if your company’s plan is breaching fiduciary duty or not. Now I am not saying your plan needs to be 100% perfect in all aspects of its performance. I am saying that if your company has something wildly unusual and unfair in its plan…they are going to get caught. That is why O’Reilly’s is in trouble.
Admin Expenses
When I first scanned their form 5500, I have noticed something I have never seen before. Their admin expenses running at over 2.6 million dollars for the year was ludicrous. Considering their asset size reported at 1.193 billion for the end year, I have never seen a company with an administration cost that high. Put it this way the popular video card company NVIDIA reported a little over 2 billion in assets since their last filing and only 33 thousand in admin costs in their plan. Participants are the ones who must pay these expenses. So, you can see how 2.6 million in annual expenses can hinder returns over time. It is still a mystery why these admin costs were so high. One thought I found from plansponsor.com was that “a plan fiduciary cannot simply put a large number of investments on its menu, some of which may or may not be prudent”. This is quite true; companies just choose the default platter of mutual funds that the 401k plan provider gives them. There is no thought of whether they are prudent, and most plan sponsors do not understand that it is their liability at the end of the day.
O’Reilly’s Investment Menu
Welp, here it is folks. The investment menu for O’Reilly’s. Once again if you want to know how the heck I am getting this information, go to the DOL 5500 search and type in O’Reilly’s Automotive. I swear no one ever realizes this is public information. Plan sponsors are so confident their current advisor and/or plan provider is treating them well; they do not know we can see their investment menu. I find it funny when sometimes I contact companies and can see with utter certainty that their investment menu is flawed. They will say something like “our current advisor assured us that our investment menu is the best in the country.” Well, no it is not, and we can all see it. There are always better mutual funds out there and it is important to consider the costs to switching. There is a reason your inhouse 401k provider is giving you their own mutual funds. You do not see the conflict of interest there?
HACAX VS. Alternative
So, the one mutual fund I will mention from the investment menu is the “Harbor Capital Appreciation Fund $HACAX.” You will see current assets reported of 10.5 million for the year. I decided to compare this fund to a cheaper and better performing alternative. That being the “Vanguard Growth Index Fund $VUG.” $VUG has high correlation to $HACAX, about .96 last I checked. This means these funds are identical with the same majority holdings in them. The difference? Look at the gold line representing the Vanguard fund. Since 2005 it has outperformed the Harbor fund by over 300%. That is a large amount to consider. Not only that but the Vanguard alternative also has a lower expense ratio, which means it costs the participants less to own it. If O’Reilly’s were to simply change $HACAX to $VUG, participants would not only be 300% higher but they would also save 1.5 million in fees over a 10-year period. So, we can see what the allegations meant when they said O’Reilly’s was not being “prudent.”
It is quite clear what the current landscape is beginning to look like for plan sponsors. The Department of Labor releasing form 5500’s to the public has brought transparency to the fairness of retirement plans. The curtains have been drawn. Gone are the days of 401k plan providers giving plan sponsors mutual funds with a conflict of interest. The best part of the transparency is the competitive landscape it is going to bring to the mutual fund industry. The managers over at the Harbor Capital Appreciation Fund might start taking notice if they see less participants in their fund. This might force mutual funds to begin lowering their expense ratios to remain relevant.
Most companies in the nation are more than likely violating their fiduciary duty. The transparency in the 401k industry is new. It's why new litigations are developing every day. Soon it will be necessary to have a 401k Fiduciary because it is not worth the litigation expenses. I mean why wouldn’t companies want a fiduciary anyways? If it means they can save money and better their investment menu, then it should be a no brainer. Plan providers brainwashed companies and employees enough to make them believe that they have the most optimal plan available. It is a for profit business, and they are going to bring any unnecessary fees whenever possible.
If you are responsible for managing your company’s retirement plan and are concerned about your current investment options, I can help. My specialty is reviewing and adding 99% value to all of my clients’ retirement plans. Contact me today If you’re ready to get the most value from your company’s retirement plan and protect yourself from personal liability as your company’s fiduciary.