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Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Get Ready for the 401(k) Wars

by Laura Rowley

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Posted on Wednesday, September 10, 2008, 12:00AM

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."

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165 Comments

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  • Yahoo! Finance User - Tuesday, October 7, 2008, 4:14PM ET  Report Abuse

    • Overall: 3/5

    OK

  • Yahoo! Finance User - Sunday, September 28, 2008, 10:05AM ET  Report Abuse

    • Overall: 4/5

    Story of hidden fees. A relative asked me to help with his 401k. Because of minimal yearly statements his had, I logged in to his account, and I took daily snapshots of each fund balances. I was astonished to see that the number of shares would actually decrease a couple times a months. I roughly calculated that the decrease would amount to 1-2% annual reduction (withdrawals are irregular, as if to confuse anyone trying to research this). When I asked the 401k company on behalf of the holder for explanation, at first they said that the change is due to market fluctuations. Now, market should affect value of shares, not the number. After beating a bush for a while they reluctantly disclosed that they do take out money as maintenance fee, based on the agreement with the employer (a tiny company). The problem I see here is that this fee is not mentioned anywhere, and is changed in additional to the the disclosed mutual fund "expense ratio fee". So personally, I am looking forward to legislation that would expose this kind of hidden money pocketing without any recourse offered to employees.

  • andrew - Monday, September 22, 2008, 9:37PM ET  Report Abuse

    • Overall: 5/5

    Hey Mr. MassMutual....your company only provides a fiduciary warranty for 404(c) related issues, which deal mainly with fund selection and diversity, but has zippo to do with fees. Plus, it doesn't protect the company from itself - - the fox that is in the hen house. How can you provide independent fiduciary advice and protect your customer from yourself...objectively? Can anyone say conflict of interest? You guys should get back to life insurance and risk management and get your paws off of our retirement savings. All the fiduciary warranty does is serve as a sales tool, a mirage that fools someone at a company that you have them fully covered and protecting in the fiduciary dept., a dept they know very little about. But, in truth you dont do that at all. I encourage you to read anything you can that Scott Simon has written for Morningstar on the subject (http://advisor.morningstar.com/articles/articlelist.asp?colId=536) MassMutual is no different than any other life insurance company (JHancock, Principal, Hartford, ING, etc)who has been feasting at the 401k trough for years. Two words: unnecessary expenses. These two words are the norm, not the exception. The best solution is divorce your fund provider from your technology provider (and eliminate conflict at the same time) and to hire an independent fee-only financial planner who can provide actual fiduciary advice to the company and participants. Most insurance agents are completely unaware of how their companies are obfuscating fees, promoting proprietary funds, largely avoiding the high use of index funds, and trying to maintain very high margins within their product. Best solution? Open-architecture platform, like what www.401kasp.com has built, and low cost index funds, preferably DFA funds (www.dfaus.com) or Vanguard. But one needs an objective fee-only planner and investment advisor, like, for example, our firm (www.orrgroup.com).

  • Yahoo! Finance User - Monday, September 22, 2008, 7:49PM ET  Report Abuse

    • Overall: 5/5

    It's about time someone started looking out for us!

  • Bradly - Sunday, September 21, 2008, 10:45PM ET  Report Abuse

    • Overall: 5/5

    Excellent article. 401K reform is way over due.

  • Bob - Sunday, September 21, 2008, 9:31PM ET  Report Abuse

    • Overall: 1/5

    These articles seem to convey that we are in debate. If only we can shed to light on the wrongdoers all will set right again. Policy is being set by people beyond the political sphere. These people are far from stupid. If policy has been to bankrupt America, there is a reason for it. We can debate all we want. That will not change. Millions of American will die. How many millions died of starvation during the Great Depression? That was during a time when the dollar was actually a lot stronger than it is now and we weren't a debtor nation. 401K fees? Forget about that. There are no 401K's. Oh I better not mention the "J" word. You'll remove this post. You probably will anyway.

  • andreana r - Saturday, September 20, 2008, 4:05PM ET  Report Abuse

    • Overall: 5/5

    Realistic and straight to the point!

  • Yahoo! Finance User - Friday, September 19, 2008, 10:49PM ET  Report Abuse

    • Overall: 4/5

    I suspect the fee abuses are much rampant among small 401K plans where the employer does not have the knowledge to shop for a low cost plan or simply does not care. Even in larger plans, there may be self dealing against the interests of employees e.g. a bank with a money management affiliate offers its own high cost funds in its 401K plan but not low cost index funds like Vanguard.

  • Yahoo! Finance User - Friday, September 19, 2008, 4:25PM ET  Report Abuse

    • Overall: 2/5

    Um, LaRue really doesn't impact this type of alleged fidcuiary breach. What, would a plan sponsor have allowed higher fees that impacted a single account rather than the entire plan? The author doesn't quite understand the LaRue decision.

  • Bob - Wednesday, September 17, 2008, 7:20PM ET  Report Abuse

    • Overall: 5/5

    We are a captive audience of savers and if our companies let the plan rip us off or conspire with them to do so, then they deserve to be penalized. thankfully, I believe my company genuinely is looking out for us, but in the past our previous owners did not (in my opinion).

  • Dennis - Wednesday, September 17, 2008, 11:53AM ET  Report Abuse

    • Overall: 3/5

    the math may be a little off, but not as much as you think...it is 800K (7.5%) vs 550K (6%) is still a loss of 250K. Compounding interest has huge impact on even tiny interest reductions...

  • Alex - Tuesday, September 16, 2008, 6:19PM ET  Report Abuse

    • Overall: 4/5

    Someone commenting wrote that "they do not care what the fees are, they only care about performance". Consider this- if you and I have the exact same fund, but you pay 1% more in fees, then fees are extremely important. This is exactly the point that Laura made, a point which was obviously not apparent to you. PLEASE READ AN ARTICLE CAREFULLY BEFORE CRITIQUING IT, OR YOU MIGHT LOOK SILLY.

  • Me - Tuesday, September 16, 2008, 5:27PM ET  Report Abuse

    • Overall: 1/5

    The author apparently does not understand math. Given the criteria in her article the 401(k) fees would be $84k with a resulting 401(k) balance of $642k.

  • __A_YAHOO_USER__ - Tuesday, September 16, 2008, 4:08PM ET  Report Abuse

    • Overall: 5/5

    Love your posts Laura. You're also hot. Question. Do you think your husband would mind sharing you, just on the side, from time to time? Ask him and get back to me. You'll have fun. Promise.

  • Irving - Tuesday, September 16, 2008, 1:56PM ET  Report Abuse

    • Overall: 3/5

    I see many are wanting the scalps of their 401K administrators. Then there are the others, that mindlessly repeat the mantra about a bear market is a buying opportunity, and you can't judge the overall return by 1 or 2 years. Here's my take: it is over. The average person has no business in this stock market, even through an advisor. All the 'empty suits' out there are trying there best to keep the losers in the market. Why? Their immensly greedy self interests (which is the source of this current debacle). I saw on CNBC this morning, they brought stooge up there to show the statistics proving the market will go up. Even the CNBC staff were embarassed. God, I'd love to get all these suits that have hurt average people so much with their bad adice and kick them all in the chestnuts, if they have any.

  • Yahoo! Finance User - Tuesday, September 16, 2008, 1:49PM ET  Report Abuse

    • Overall: 5/5

    A lot of commentators here seem to have missed the point of this article completely, judging by some of their rantings. The fact is, some employers DO cover the administrative costs of their 401(k), and others gladly allow those costs to be passed on to the participants. Obviously, the former is preferable to the latter from the employee's point of view, and it's reasonable that a large employer should cover those costs. What's more egregious is employers who actually PROFIT from their 401(k) by getting a financial benefit from the administrator in exchange for letting them rip off the participants.

  • JSS - Tuesday, September 16, 2008, 1:44PM ET  Report Abuse

    • Overall: 4/5

    A nice article, with a glaring problem. Just as high fees do not guarentee high returns, neither to low fees guarentee high returns either. You buy the fees when you buy the fund - you sell the fees when you sell the fund. Obviously the higher the fee, the more the fund must overcome. But I am looking for performance, and if a high fee fund has better returns than a low fee fund, the savings that everyone likes to brag about, is actually an investment opportunity loss. At the end of the day the only thing that matters is how big your number is. Fees may or may not mean that much. I know a friend with a plan with many low cost funds, but they suck, so show me the money he has "saved". He certainly doesn't have it.

  • Yahoo! Finance User - Tuesday, September 16, 2008, 10:22AM ET  Report Abuse

    • Overall: 4/5

    Tomass - you must not be a savy investor! yeah, the market is down but this is the time to increase your contributions to your 401k. ahve you ever heard of buying low? right now there's a sale on the stock market! and in order to get the avg 8 to 10 % there will be years when you're down by double digits, but also when you're up double digits. what always follows a bear market? a bull market! not that tomass would understand those terms!

  • Richard - Tuesday, September 16, 2008, 10:07AM ET  Report Abuse

    • Overall: 4/5

    What's the status of CMO's in 401K's? They should be getting wiped out.

  • Truth S - Tuesday, September 16, 2008, 8:51AM ET  Report Abuse

    • Overall: 2/5

    Laura Rowley, Now, we are in bad economy! Will you change your photo with a big smile?!

  • Yahoo! Finance User - Tuesday, September 16, 2008, 12:35AM ET  Report Abuse

    • Overall: 3/5

    Whatever happened to accountability in this country???? Why is it that when employees lose money in a 401K it is the corporations fault? When fees are higher then "assumed" it is the corporations fault? When people retire and a corporations decides not to offer post retirement benefits, it is the corporations fault? 401K's, the Stock Market, and Corporations are NEVER at fault, people that blindly invest in these options, and don't take the time to protect themselves should be turning the finger around and asking themselves why. It is very scarry to me that in todays society, my generation and those following are being taught to simply go to a good university, find a good company to work for, give them upto half your salary to be invested who knows were and then sit back and hope that when you turn 67-1/2, that magical number assigned by the government, that you can finally take that ultra cool vaction, spend more time with your kids, or just sit back and sip a corrona on some beach in mexico. Well not sure about the rest of you, but I would much rather control the outcome of my financial life, enjoy all those "special retirement activities" NOW and instead of focusing on building some Nest Egg, focus on building a Legacy that will be everlasting.

  • Yahoo! Finance User - Monday, September 15, 2008, 10:41PM ET  Report Abuse

    • Overall: 5/5

    After today's events on Wall St., I'm tired of people complaining when there's a bad day on Wall St. People expect big gains and complain when they have big losses. I'd get rid of 401k's. Let people manage their own money. If they don't want to save for retirement, that's their problem. If they invest in risky funds, that's their problem. Forcing people to contribute to 401k plans just gives them the chance to blame someone when something goes wrong but they're quiet when their funds have a great day. We need to stop relying on the government for everything.

  • Yahoo! Finance User - Monday, September 15, 2008, 9:53PM ET  Report Abuse

    • Overall: 4/5

    Greed is what fuels every financial meltdown. Live by the sword, die by the sword. How about some regulations (oh no, not the "r" word) so we don't have to worry about the next meltdown. Of course we can't prevent every problem from occuring, but most certainly we can do much better than the past year or two. Just the simple fact that L.R. blogged this identifies the need for more control in the financial market.

  • Yahoo! Finance User - Monday, September 15, 2008, 9:48PM ET  Report Abuse

    • Overall: 1/5

    Another example of scholars expecting investment management and service to exist in a vacuum and undereducated plan participants expecting plan sponsors to have financial professionals immediately available to explain their investment options to them... all for free.

  • Yahoo! Finance User - Monday, September 15, 2008, 8:47PM ET  Report Abuse

    • Overall: 4/5

    With the financial market imploding on itself due to plain and simple greed, I was wondering where the Streets moneyed elites would turn to for the next big infusion of money into their coffers. I think this is one of the first articles that points to their next target..get a piece of the 2.3 trillion 401K pie. watch to see how they game this one!

  • Yahoo! Finance User - Monday, September 15, 2008, 5:32PM ET  Report Abuse

    • Overall: 5/5

    Boeing Company has bounced it's employees accounts worth 10s of billions to at least 4 companies over the last 20 years and each time we get to cover up the last managing company's rip off of the employees. There were several examples of the fund manager not just getting huge unidentified and well hidden fees, but also using the Boeing stock funds to manipulate the company stock price at key points when the company was about to pay our profit sharing. There is a fine line between private or free enterprise and fraud, and 401k's are just another place where the Enron's of the modern age take advantage of their employees for personal greed's satisfaction... "The price of liberty is eternal vigilence."

  • g_wesley - Monday, September 15, 2008, 5:24PM ET  Report Abuse

    • Overall: 5/5

    Excellent story. When I turn 59-1/2 I'm going to roll my contributions out of my 401(k) and into an IRA, where I can have some control over the funds offered and the fees charged.

  • Yahoo! Finance User - Monday, September 15, 2008, 4:23PM ET  Report Abuse

    • Overall: 5/5

    I'm a CPA and worked in the mutual fund industry. All the points this author makes in this article are spot on. In many cases, HR Depts simply pick high fee plans having fallen prey to slick marketing.

  • Yahoo! Finance User - Monday, September 15, 2008, 3:54PM ET  Report Abuse

    • Overall: 5/5

    Excellent! People have to know what they are exposed to before relying on these plans for retirement. There have been too many gimmicks and rip offs pulled costing many a small fortune or more and in many cases their right to financial security. People have to know that they are protected or being victimized! Well done!

  • Yahoo! Finance User - Monday, September 15, 2008, 1:33PM ET  Report Abuse

    • Overall: 3/5

    I just can't get what everyone is in such a fury over. Are we now going to go after our employer for the cost of health care, life insurance, dental, etc. These companies are trying to offer a benefit to get you to work for them. Relax if you don't like it don't invest. Some people are just looking for something to complain about. Is their need for disclosure, yes. Is it going to stop you from investing? I think if people worried more about saving and less on spending everything they made we would all be better off.

Showing comments 6-35 of 165<< PreviousNext >>
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