Laura Rowley Money & Happiness

In December, a San Francisco court is expected to begin hearing arguments in the first of a wave of class-action lawsuits focused on the mismanagement of defined contribution plans, including 401(k)s. The lawsuits accuse a number of Fortune 500 companies of failing to put workers' interests first, as federal law requires -- resulting in millions of dollars of losses over time.

Specifically, the suits charge that employers allowed plan administrators and other third-party service providers to charge excessive, hidden fees to workers in the plans, breaching their fiduciary duty under the Employee Retirement Income Security Act (ERISA).

In some cases, the suits say, employers were asleep at the wheel as financial services firms extracted egregious fees; in other cases, the company used the plans as leverage to obtain better terms for financing, and allowed the third-party plan administrators to overcharge workers in the plans.

Competing Interests

Schlichter, Bogard and Denton, a law firm based in St. Louis, has filed more than a dozen lawsuits in the last two years, including actions against Kraft Foods, Boeing, and Bechtel, the global engineering, construction, and project management firm based in San Francisco. The Bechtel trial opens in December in San Francisco, according to partner Jerome Schlichter.

"The duty of the plan fiduciary is to look out for interest of employees and operate the plan for their exclusive benefit," says Schlichter. "The cases that we have filed allege a pattern of ignoring fiduciary responsibility, and also in some instances, putting the interest of the fiduciary ahead of that of employees and retirees.

"If the employer uses the company's investment managers in the plan with whom it has other relationships -- investment banking, lines of credit -- you can't have the 401(k) plan participants subsidize those other services," Schlichter continues. "You can't have them pay a higher fee so their employer can get lesser fees on corporate services. That's not putting plan participants ahead of plan sponsors."

A Lawsuit Boom

Retirement plan litigation could become a cottage industry following a crucial Supreme Court decision earlier this year, according to David Loeper, author of "Stop the 401(k) Rip-Off!" and CEO of Wealthcare Capital Management in Virginia.

In LaRue v. DeWolff, Boberg & Associates, Inc., the court ruled that individual plan participants can sue the plan's fiduciaries if they "impair the value of plan assets in a participant's individual account." Previously, filing suit required that everyone in the plan be affected by the mismanagement. (LaRue had instructed his 401(k) plan to sell certain investments in his portfolio and the company never followed through, resulting in large losses when those investments subsequently declined sharply.)

The lawsuits are part of a recent groundswell of concern over the amount of disclosure provided to workers who participate in defined contribution plans. According to the Labor Department, there are an estimated 437,000 participant-directed individual account plans covering some 65 million participants, with almost $2.3 trillion in assets.

Fee Busters

Meanwhile, several members of Congress have proposed legislation to force more disclosure, and a Labor Department proposal introduced over the summer would require plan fiduciaries to disclose more detail on investment expenses and administrative costs in actual dollars on a quarterly basis.

Administrators would have to spell out the costs for legal, accounting, and record-keeping services in terms of what it costs an individual account holder. These costs are typically so well hidden that two-thirds of workers in a 2007 survey thought they paid no fees at all in their 401(k) plans. As it stands, "you're not going to get the answer [on fees] by contacting the benefits department because they don't know, or by looking at your statements because it's not in there," says Loeper. "You have to go on a little treasure hunt to come up with documents."

The Labor Department estimates that plan participants would save more than $2 billion in fees over the next decade, as greater transparency boosts competition and forces plan administrators to cut their fees.

Break It Down

So what difference can 1 or 2 percent in fees really make to a worker? "It has profound implications to investors later in life, and they don't recognize it," says Loeper.

Consider someone who joins a 401(k) at age 25, contributes $2,500 a year for 40 years, and receives a $1,000 annual company match, says Loeper. Assuming the portfolio returns 7.5 percent annually, the participant would end up with more than $1.2 million. Someone who's charged 1.5 percent more in additional expenses over the life of the investment will pay out $500,000 in extra fees by the time they're ready to retire, Loeper calculates.

"You think about the compromises you make -- what did it take for that person to accumulate that $1 million in retirement?" he says. "For 40 years he worked in that job, made compromises to save. What did the [retirement plan] salesman do to justify getting that $500,000?"

Getting Personal

Loeper wrote his book after discovering his own company plan administrator was covertly charging hidden fees to his firm's plan. "We put our company plan up to bid every year to be a prudent fiduciary, and the sales pitches were some of the most unethical things I've ever heard," he says.

"Literally, people would say, ‘If you use these higher-expense funds your employees won't know about it and you won't need to pay administrative costs as a company' -- basically saying, rip off your employees and we'll bundled it in and that will offset your administrative costs.

"The plans with the biggest abuses [have] less than $10 or $20 million in assets," says Loeper, whose book walks readers through the complex process of discovering what their plan is costing them. "That's where the most egregious pain is being inflicted on employees without them knowing it."