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Columns: Boomer Bucks
Barbara Mlotek Whelehan   Expert: Barbara Mlotek Whelehan
Are fees eating your 401(k)?
Employees across the country are mad as heck and filing lawsuits over 401(k) plan fees.
Boomer Bucks

Why's your 401(k) plan heading south?

In recent years, people who run 401(k) plans increasingly have come under legal assault.

In the LaRue v. DeWolff Boberg case, the Supreme Court unanimously found in favor of Texan James LaRue, who lost $150,000 in his 401(k) plan because his former employer allegedly neglected to move his assets to more conservative investments despite LaRue's repeated instructions to do so.

The case was a big deal because previously individuals couldn't sue under the Employee Retirement Income Security Act, known as ERISA, unless the losses affected the entire plan's assets. It's the first time the court directly addressed whether workers could sue over individual losses.

But people can lose money in their 401(k) plans in less obvious ways than being in the wrong investments during a market freefall. In fact, most of the lawsuits out there focus on the fees charged to these so-called "defined contribution" plans. Over time, fees can significantly impact a portfolio.

Capitol Hill's focus on fees
Lawmakers now are paying attention to fees and introduced several bills lately, including the 401(k) Fair Disclosure for Retirement Security Act. But it took them a while to notice that most Americans didn't have the cushy retirement plans they enjoy.

The buzz about 401(k) plans

When Congress was working on the Pension Protection Act a couple years ago, many members "discovered that most Americans aren't covered by a defined benefit plan," says Brian Graff, executive director of the American Society of Pension Professionals & Actuaries, or ASPPA. A defined benefit plan is an old-fashioned pension plan that pays a benefit for life based on your earnings and tenure at a job.

"That came as a real shock to them. And they figured out that less than 20 percent of the work force has one of those things, and most people get their savings from 401(k) types of plans."

Graff spoke to retirement plan professionals at the recent ASPPA 401(k) Summit in Orlando, Fla.

Many lawmakers were also surprised to learn that the 401(k) plan is not a guaranteed benefit, Graff said. But they promptly realized that 401(k) plans are impacted by three things: plan contribution amounts, investment returns and fees. Lately they've become "very, very, very interested in fees," says Graff.

The government's retirement plan
Congress' retirement plan is covered by the thrift savings plan, "sort of the federal government's 401(k) plan," Graff explains. "And they're very proud of the fact that the fees in the thrift savings plan are extremely low. Some describe it as only 6 basis points to run the thrift savings plan. And they don't understand why the rest of the world can't operate on just 6 basis points."

Mind you, 6 basis points is equivalent to 0.06 percent, or six hundredths of 1 percent. This is about half the cost of the cheapest index fund available to individual investors in the marketplace. Graff says the rest of the world can't operate on a fee that tiny, in part because businesses have to comply with ERISA -- those massive federal regulations that require plans to follow certain protocols. Costs for small business plans are higher than those of the single largest employer plan in the world, which enjoys certain economies of scale.

"For small plans, fees and expenses tend to be higher as a percentage of assets than for large plans," explains Fred Reish, an attorney with Reish Luftman Reicher & Cohen. "That's because many of the same services need to be provided to small plans, but they have less money by definition."

Reish, who specializes in employee benefits law, says that similar-size plans should be charged about the same amount, and the prices should be reasonable. But "reasonable" is more of a range than an absolute number.

"The problem is that, by and large, many providers in the 401(k) marketplace do not give clear and complete information to plan sponsors," he says. Plan sponsors, for your information, are employers who offer retirement plans to their workers.

Next: How high can fees go?
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