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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 Stop the 401(k) Rip-off!

"A great fraud is being perpetrated on the American public," Loeper charges. "Employees who participate in their company 401(k) plans are being charged billions in fees annually -- and no one is looking out for their best interests -- even though the laws say both plan sponsors and employers should be held responsible for acting in their employees' best interests."

He gives some examples of excess costs:

  • 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!"

As a result, total costs in your plan could exceed 4% a year. And that's pretty high. Loeper explains that even a small company, with about 25 employees, could easily set up a plan with less than half of a percentage point in total annual costs. That savings adds up to huge differences in your plan balance -- and your retirement lifestyle -- over a 40-year working career.

Figuring Out Your 401(k) Plan Expenses

The Department of Labor, which regulates retirement plans, has just proposed new regulations for plan cost disclosure and has created suggested sample disclosure documents. They would require clear disclosure by all service providers of all fees.

The industry that provides these products and services is vigorously opposing this disclosure form, saying they already provide "reasonable" disclosure, and that to do more would add to the cost burden on the plans! In reality, the sunlight should make it easier for employers to opt for lower-cost retirement plans for their employees.

Under Federal law, the employer has a fiduciary responsibility -- and thus a liability -- for the terms of the retirement plan. That includes not only choice of funds, but fees and costs.

Attorneys see fertile ground for class-action suits against expensive plans. One plaintiff's law firm has instigated lawsuits targeting at least 17 major corporations. That fact alone should make top management more sensitive to employee complaints about retirement plan costs.

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.

Gallagher Retirement Services provides a "Fee Disclosure Forensic Audit" for company retirement plans of all sizes.

It's a growing need, according to Michael DiCenso of Gallagher: "In our recent audits we have found wide ranges and disparity in fees for service rendered inside of 401(k) and 403(b) plans, as well as defined-benefit plans. Our audits are designed to help plan sponsors meet their fiduciary duties."

Here's a final thought: A 25-year-old employee who currently has around $25,000 in his or her retirement account, and whose annual contributions (and employer matches) total only $2,500, in a plan that is allocated 80% to stocks and 20% to bonds, could forfeit more than $660,000 by age 65 -- if the plan charges excess fees totalling just 1% a year. That should inspire you to check out costs in your company plan. And that's The Savage Truth!

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Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book, The Savage Number: How Much Money Do You Need? in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures.

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