How to Fix Your Retirement Plan
Is your 401(k) plan ripping you off?
By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome
For most of us, a 401(k) is like a big rock that we don’t want to turn over. We’re afraid of what may be skittering out when we do.
An untold number of 401(k) plans are charging employees too much to manage and administer their retirement kitties. The gremlins of excessive fees add up over time.
While it doesn’t sound like a lot, a one percentage point increase in plan investment fees can cut your retirement income by 28 percent over a work life of 25 years, according to the U.S. Department of Labor (DOL).
Lately, though, employees have silently been winning battles in getting these fees reduced and restoring hope for a decent retirement. Combined with a new DOL rule that will provide expense disclosure, this has been a watershed year for employees fighting to get a decent 401(k) program.
Some 85,000 employees in the $6 billion General Dynamics Corporation (GD) 401(k) plan recently won a settlement in a lawsuit against the company. The workers claimed that they were being overcharged on fees within the plan.
As part of the settlement, the defense contractor’s insurers will put $15 million back into the plan, which will then be regularly reviewed by independent consultants to see that the employees are getting a fair shake on the fees. The company denies any wrongdoing.
Along with another recent case against Caterpillar, Inc. (CAT) by its employees, the General Dynamics suit is a landmark. This litigation represents some of the first victories by employees over bosses who bury and pass along needlessly onerous expenses in 401(k)s.
The General Dynamics settlement is a keystone because it appoints a watchdog, who is in charge of getting the best deal for employees on plan services. For example, administrative fees will be monitored by an independent fiduciary not connected to the company.
Some plans also charge high fees for middlemen called recordkeepers, who are involved in most 401(k)s. Instead of charging reasonable flat fees, these administrators were getting a percentage of assets under management, which was an awful arrangement for employees. The General Dynamics settlement mandated lower expenses for employees.
“Recordkeeping is a commodity,” says Jerome Schlichter, a St. Louis-based labor attorney who represented the General Dynamics employees and workers in similar cases. “Every 401(k) needs one, but cost has nothing to do with the size of the account. It should be a flat fee.”
Schlichter first filed a wave of similar suits against 14 large employers in 2006. Two of the cases have been dismissed, three are in the process of settlement and nine are outstanding.
These suits have shed needed sunlight on practices that few employees know about and most employers are loath to admit. Here are some things you should check with your 401(k) administrator, CFO or human resources department before the end of the year:
- Do you have retail-class funds within your 401(k)? This is the equivalent of Wal-Mart going into another store, buying something off the shelf and charging you the same undiscounted price. Funds within 401(k)s should be institutionally priced. That means expense ratios less than 0.10 percent annually for a stock index fund and 0.15 percent for a bond fund.
- No-bid funds. Your plan administrator should get the best diversified portfolio at the lowest cost. They should bid out services and fund management on a regular basis to do this. That’s their responsibility under federal law.
- Independent Review. An outside expert such as a fiduciary should thoroughly vet the plan to see that vendors are giving you the best price. Every plan can and should do this.
If you have no other contact with your company’s human resource department this year, make sure they are following up on getting you a fair shake in your 401(k). The savings will add up over time and boost your retirement fund.
Every dollar counts in a 401(k) these days since the average American has saved less than 7 percent of the desired amount for a comfortable retirement, reports a Wells Fargo survey.
In the case of General Dynamics, employees will see an additional $1.2 million in their plan.
Sometimes turning over that rock can be quite profitable.