Workers' suit highlights secrecy over 401(k) fees

Personal Finance

November 05, 2006|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

Employees at 10 of the nation's largest companies, including Bethesda-based Lockheed Martin Corp., recently shook the 401(k) world by suing their employers over their plans' fees.

The workers claim the employers failed to make sure the plan fees are reasonable, as required. By taking their gripes to court, they are shining a light on the various investing and admin- istrative fees that go into a 401(k).

Regardless of the merits of the lawsuits, consumer advocates and benefits experts say that increased attention to fees is a good thing.

It's a safe bet that many workers don't know how much they are paying on their 401(k)s. Even some employers are in the dark, relying on outside experts to handle the 401(k) details.

Workers with sharp eyes and a calculator can generally figure out what they pay by going through the prospectus and quarterly statement, but they will have little luck uncovering the soft-dollar arrangements that could affect their nest eggs.

But with so many financial futures now riding on these retirement accounts, with traditional pensions rapidly disappearing, fees and expenses matter.

"Even if the lawsuits amount to nothing ... this is kind of a wake-up call for plan sponsors that they need to be paying more attention to fees and expenses," said Gregory L. Ash, a benefits lawyer with Spencer Fane Britt & Browne's office in Overland Park, Kan.

It's no easy task for workers to decipher the cost of a 401(k). There are enough kinds of fees to make the most conscientious investor's head spin.

Workers are entitled to know the fees they pay. And for those investing in mutual funds, the biggest expense will be related to the fund's money management. This is spelled out in the prospectus. Administrative costs - often borne by workers - are harder to pin down.

Taken together, workers pay 0.50 percent to about 2 percent a year for investment management and administrative-related services, said David Huntley, a principal with HR Investment Consultants in Towson. Smaller plans tend to be on the high end.

To put fees in perspective, consider a worker with the average account balance of $60,000. The worker could pay $300 to about $1,200 a year in fees.

"There is no standard. It's all over the place," said Edward M. Lynch Jr., a benefits expert with Dietz & Lynch Financial Strategies Group, a retirement plan consultant in Massachusetts.

Some mutual fund companies, for instance, will charge little or no fee for administering a 401(k) if their mutual funds are in the plan. They make money on fund management fees.

Some administrators or record keepers will take a percentage of the assets in the plan. Workers see their account balance after the fee is taken out, experts said.

Administrators and other service providers may also be compensated by revenue sharing. A fund company, for instance, will share some of the money it makes with an administrator for keeping track of workers' accounts or undertaking other tasks on the fund company's behalf.

Revenue sharing could be a good thing if it is fully disclosed and reduces costs for workers, Lynch said. But it can be a problem if it influences the decisions on which mutual funds end up in the 401(k), he said.

The 10 employee lawsuits, all filed since September by the same St. Louis law firm, target a variety of expenses.

Revenue sharing is one of the issues raised in the Lockheed case. Workers claim that millions of dollars that service providers earned from undisclosed revenue sharing should have been used to offset the expenses paid by the plan.

Workers also claim that their returns are being eroded by the plans' high, poorly disclosed fees. Employees don't say exactly much they overpaid, but they want to recoup that money.

"We believe the suit to be without merit and we intend to vigorously defend against it," said Lockheed spokesman Thomas Greer.

Northrop Grumman, one of Maryland's largest employers, was also sued. The California-based company said it doesn't comment on current litigation.

Some employer advocates say the lawsuits' targets are big companies that typically have the clout to negotiate low fees and hire outside professionals to construct the best plans possible.

"We do know that in general large companies have very low fees," even lower than investors could get on their own outside the plan, said David Wray, president of the Profit Sharing/401(k) Council of America, which represents employers.

Even without the lawsuits, improved fee disclosure is likely coming.

The Department of Labor, for instance, is proposing greater fee disclosure beginning in 2009 on an annual document that employers file with government on their 401(k) and pensions. It also is working on a plan to help employers get information before hiring service providers about fees, revenue sharing and any conflicts of interest.

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