In December, a San Francisco court is expected to begin hearing arguments in the first of a wave of class-action lawsuits focused on the mismanagement of defined contribution plans, including 401(k)s. The lawsuits accuse a number of Fortune 500 companies of failing to put workers' interests first, as federal law requires -- resulting in millions of dollars of losses over time.
Specifically, the suits charge that employers allowed plan administrators and other third-party service providers to charge excessive, hidden fees to workers in the plans, breaching their fiduciary duty under the Employee Retirement Income Security Act (ERISA).
In some cases, the suits say, employers were asleep at the wheel as financial services firms extracted egregious fees; in other cases, the company used the plans as leverage to obtain better terms for financing, and allowed the third-party plan administrators to overcharge workers in the plans.
So what difference can 1 or 2 percent in fees really make to a worker? "It has profound implications to investors later in life, and they don't recognize it," says Loeper.
Consider someone who joins a 401(k) at age 25, contributes $2,500 a year for 40 years, and receives a $1,000 annual company match, says Loeper. Assuming the portfolio returns 7.5 percent annually, the participant would end up with more than $1.2 million. Someone who's charged 1.5 percent more in additional expenses over the life of the investment will pay out $500,000 in extra fees by the time they're ready to retire, Loeper calculates.
"You think about the compromises you make -- what did it take for that person to accumulate that $1 million in retirement?" he says. "For 40 years he worked in that job, made compromises to save. What did the [retirement plan] salesman do to justify getting that $500,000?"
