Finding, and Battling, the Hidden Costs of 401(k) Plans John F. Wasik 20 Hours Ago The New York Times 80 SHARES 7 COMMENTSJoin the Discussion Like millions of retirees who assumed their companies had taken care of them, Ronald Tussey never thought that his retirement plan might be flawed. He trusted his company so much he kept his money in his 401(k) long after he left. Having worked as an engineer for 37 years, ultimately at ABB Inc., where he retired 11 years ago, Mr. Tussey said he never paid much attention to the fees in his retirement plan and assumed the company was looking out for my best interests. But after seeing a television program on the negative impact that 401(k) expenses can have on retirement savings, he hired a lawyer, who filed a class-action lawsuit in 2006 against ABB and plan administrators. expenses in 401(k) plans, at his home in Lake Ozark, Mo., Nov. 6, 2014. Mr. Tusseys suit became a landmark case that highlighted the sometimes excessive expenses in 401(k) plans. The suit remains largely unresolved today, while Mr. Tussey has become an archetype of an inexperienced litigant caught up in a legal battle far more complex than he ever expected. I had no idea about litigation, Mr. Tussey says. It was unbelievable. More from The New York Times: Doubting the economic data? Consider the source Augmenting your password-protected world A new bounty of oysters in Maryland, but there is a snag Like many employees, Mr. Tussey, now 70, was told that his retirement plan was free, even though middlemen were deducting expenses from his savings. In many retirement plans, a significant amount of future retirees funds are devoured by fees. According to a 2012 study published by the progressive think tank Demos, high 401(k) fees can drain $155,000 from an average household over a lifetime. Higher-earning households can lose even more — up to $278,000. Growing employee resistance, resulting from a greater awareness of plan costs, has resulted in more than 30 lawsuits against 401(k) plans and employers since 2006. Seventeen have been dismissed, but these suits are time-consuming, complex and difficult to litigate. The oldest 401(k) suits, like Mr. Tusseys, have been winding through courtrooms for the last half decade. Despite a federal requirement that plan fees be disclosed and numerous reports on 401(k) plan flaws, few employees question how much they are being charged, much less take their employers to court. As Mr. Tussey learned, time spent on legal proceedings is clearly not on a par with time spent traveling the world, working in the community or taking up a new hobby. After more than six years of litigation, a federal court in Missouri ruled in March 2012 that ABB and its record keeper, Fidelity Investments, violated fiduciary duties to the plan and participants and were liable for $37 million. ABB appealed part of the case, but the United States Court of Appeals for the Eighth Circuit in St. Louis this year upheld the Federal District Court judgment that $13.4 million be awarded to participants. Read More › IRS changes the 401(k) rules for 2015 A $1.7 million district court judgment against Fidelity was reversed by the higher court. Nothing, to date, has been paid to ABB 401(k) plan participants. Lawyers representing the employees want the Supreme Court to review the case. In the meantime, though, there are lessons here for current and future retirees. At the heart of the suits are a raft of obscure fees and services that few employees will be able to discern. Unless employers absorb all of the expenses, you must pay the bills for plan record-keeping, administration and fund management. Most fund expenses not covered by employers are deducted from plan assets — the money pooled for your retirement — and show up in an expense ratio, which is expressed as an annual percentage of what you have invested. If your plan charges 1 percent on $100,000 invested, you are paying $1,000 annually in fees. Read More › Top 10 reasons you should never borrow from your 401(k) How much is too much for 401(k) expenses? It depends on the size and complexity of the plan. The Department of Labors fee disclosure requirement, which went into effect about two years ago, will tell you how much is being deducted from your savings, but it wont tell you if that amount is too much. In the somewhat opaque world of 401(k) expenses, a large plan may be the best deal, but smaller plans can still offer lower expenses if employers shop around. Often only an audit by an independent fiduciary who knows how to compare similar plans can determine whether you are being overcharged. Jerome J. Schlichter, a St. Louis lawyer who represented Mr. Tussey and plaintiffs in other 401(k) suits, said there were some common elements in plans that could indicate lofty expenses and conflicts Even though no extra service may be provided, record keepers may reap higher compensation just because total assets increase from year to year. This number can be hard to find and even tougher to examine. Is your plans record-keeping fee fair? You may need an independent consultant — someone with no financial interest in the plan, funds or middlemen — to properly vet this number. Also look at revenue sharing. This is an often complex arrangement where a fund manager shares some of the fees it receives from fund expenses with other service providers, such as brokers. This practice, though declining, is particularly insidious since it provides little or no value to employees. It is derisively referred to as a kickback by 401(k) critics. Expenses, perhaps the largest target for 401(k) suits, can be the easiest to vet because fees can be compared across plans and funds. Does your plan charge a retail fund fee? It shouldnt because 401(k)s, even small ones, have access to the lowest-cost institutional or exchange-traded funds, which charge as little as 0.04 percent annually. Read More › Four ways saving for retirement is getting easier If your fund company offers multiple share classes, you will also need to know if you are getting the least expensive class. To get a basic idea, compare your plan with similar 401(k)s on Brightscope. You can also look up individual fund expenses on Morningstar. You will also need to see what kinds of funds are in your plan. Is your employer, particularly if its a financial services company, offering in-house or proprietary mutual funds? They may be more expensive than other funds and pose clear conflicts of interest. And keep an eye out for unnecessary fees that may be eating up your nest egg. These include commissions, also known as loads, 12b-1 marketing fees, insurance-related charges, wrap fees and transaction expenses. Even if you are acutely attentive to financial details or can fathom the arcane language of annual plan statements like 5500 forms, this is tough. Except for fund management fees, its not easy to spot a blatant overcharge. Mr. Schlichter has found that even in a new era of plan disclosure, most employees are not aware of these fees and dont learn much from their plan statements. For help, you might want to consult outside resources, like the website Personal Capital. The online money manager has a free 401(k) Fee Analyzer. It will tell you how expenses are affecting your nest egg. The Department of Labors website has a wealth of information on 401(k) fees and disclosure, and you can also find a breakdown of 401(k) expenses at Bankrate. Read More › The procrastination penalty for retirement savers What if youve found that your plan is a rotten deal, but you dont want to move your money and cant get your employer to change the plan? As Mr. Tussey knows, it may be a long, rocky road through the court system, at the end of which you may not reap a penny. Lawyers representing employees must prove not only that plan participants were charged exorbitant fees or employers showed a clear conflict of interest, but also that employers broke federal law by breaching their fiduciary duty. Thats a legal standard that says employers must do everything in their power to act prudently on behalf of workers. In the case of 401(k) plans, that means finding a reasonable selection of low-cost funds and services. But the legal landscape may change substantially. In October, the Supreme Court agreed to hear a 401(k) fee case. If the court rules in favor of employees, the floodgates could open for more retirement plan lawsuits.
Posted on: Sat, 08 Nov 2014 11:45:48 +0000
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