How to Know if Your 401(k) Plan is Cheating You
Many employers offer 401(k) plans to their employees in order to encourage employee retention and help them to save for retirement. It can also help companies to attract quality talent from the workforce and become an asset on the company’s balance sheet. But some companies also use these retirement plans for their own benefit in a way that was not intended by ERISA regulations, and employees can end up footing the bill as a result, Scott Hanson, co-CEO of Hanson McClain Advisors, writes in CNBC. Here’s what you need to know in order to find out whether your company’s 401(k) plan is ripping you off.
High-Cost Proprietary Funds
Employees at Wells Fargo filed a suit against their employer alleging that the firm had acted against the best interests of its employees in its retirement plan by offering one of its own target-date funds that charged fees that were three times higher than those of a low-priced competitor. The excess fees charged by this fund went directly back to Wells Fargo. (For more, see: Are High 401(k) Fees Putting Your Retirement At Risk?)
The lawsuit reflects a wider practice that many financial firms have embraced when it comes to 401(k) plan administration. These plans come with many costs to the employer including startup, compliance and the ongoing costs associated with administrating the accounts of the participants. Many firms have done what Wells Fargo did, filling their plans with high-cost proprietary funds that will collect enough fees from participants to offset these expenses.
What Participants Can Do
So what can you do to find out whether your employer has been ripping you off in your 401(k) plan? There are several steps that you can take. First, if you work for any type of investment or mutual fund company, then go through the investment offerings in your plan to see whether they have offered any of their own funds or other investment alternatives to employees. If they do, then look carefully at the expenses of these funds and compare them to other similar funds at low-cost fund companies such as Vanguard. If your fund’s fees are substantially higher than those of its competitor or charges a front-end sales load, then it’s probably wise to stay away from it and invest instead in a lower-cost alternative that will charge you lower fees.
And employees who work for any kind of company need to check their plans to see whether the funds that are offered in the plan are offered inside of a variable annuity contract. These vehicles add an additional layer of fees into the mix in return for providing various forms of insurance protection on the money that is placed into them. But these fees will eat into the returns that your funds provide and leave you with a lower rate of return over time. (For related reading, see: How to Know if Your 401(k) Plan Fees Are Too High.)
If you discover that your employer’s plan does not offer good investment choices, don’t hesitate to point this out to them. Your employer has a fiduciary responsibility to provide your plan with competitive investment options, and they can be hit with a lawsuit or disciplinary action from regulators if they fail in this regard. Your next move should be to move your money that is inside the plan into an IRA if your employer’s plan allows for in-service distributions. This will give you control of the money and allow you to move it into low-cost alternatives that will give you a better rate of return over time.
Finally, it may make sense to reduce your plan contributions to the level where you’re contributing just enough to take full advantage of your employer’s matching contributions. Direct any excess contributions into a traditional or Roth IRA where you decide how to invest the money.
The Bottom Line
Participants in 401(k) plans have a legal right to have their plans managed in a cost-effective manner. They should keep in mind the points above to ensure they are not being ripped off. (For more, see: The Hidden Fees in 401(k)s.)