Is Your 401(k) Plan Ripping You Off?
This is an update of Terry's Feb. 17 column, with information about a new Supreme Court ruling added at the top.
The Supreme Court made it official in a decision released this week: Employers are not only responsible but can be sued if they fail to live up to their fiduciary responsibilities in offering 40l(k) retirement plans. Specifically, individuals can sue if employers fail to provide prudent investment opportunities, or if employers set up plans with fees that are not "reasonable."
In effect, in ruling on LaRue vs DeWolff, the Supreme Court has invited employees -- and lawyers -- to examine the costs of retirement plans. That includes the hidden costs that are buried deeply in plan documents. Those costs can make a huge difference in your ability to reach your retirement dreams, even if you save regularly in your company's plan.
Though the specific ruling revolved narrowly around the rights of individuals to sue plan providers, the impact will be huge. Now, it's up to employees to do some digging and ask some questions.There might be some ripoffs lurking in your 401(k). Will you have to work an extra three years before retiring, in order to overcome the drag of excessive fees in your 401(k) account? Will your annual retirement income be reduced by $3,100 a year because your company 401(k) plan contains funds that charge high annual expenses? Are you willing to save an extra $800 a year to make up for the fact that your company has a retirement plan that has an extra half of one percent in costs each year? That's likely to be your fate, unless you step up and complain about your company's expensive retirement plan, says David B. Loeper, author of
- Fund choices that have high management fees and expensive trading costs, instead of lower-cost index funds.
- High plan expenses that range from record-keeping fees to per-head charges that are applied to the plan as a whole, but not reflected in investment results, and are hidden deep in plan documents.
- "Wrap fees" that raise the cost of the hidden expenses by 1% to 3% a year.
- "Mortality charges" of 0.5% to 1% annually in retirement plans sold by insurance companies. Loeper notes that these promises to pay your beneficiary at least the amount you originally invested involve "a very high annual fee to guarantee a zero percent rate of return after you're dead!"
Figuring Out Your 401(k) Plan ExpensesThe
What Can You Do?There are two roads you can take to bring clarity and low cost to your company's retirement plan. Do it Yourself. Stop the 401(k) Ripoff provides a roadmap for employees to understand the fees and costs, document the excesses in a presentation to management, then to organize themselves to protest, and if necessary, bring the documentation in a complaint to the Department of Labor (866-4-USA-DOL). Of course, it's possible that complaining to DOL could put your job at risk, so you may want to check up on protection for whistleblowers. Get Professional Help in Evaluating Your 401(k) Plan. Just as the plan retains consultants to choose their investments, the plan participants may retain a consultant to evaluate the costs and fees of the plan. In fact, once a company is challenged on these issues, it may actually retain a consultant to give an independent opinion.
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