Fidelity Investments, the nations largest retirement-plan manager, is currently involved in a lawsuit involving accusations of 401(k) mismanagement. The employees of Deere & Co., a farm equipment manager in Illinois, claim they were charged undisclosed and excessive fees in connection with their 401(k) plan. Fidelity acts as trustee and record-keeper for the plan and manages the funds offered to the participants. In December 2006 the employees filed in the US District Court Western District of Wisconsin, naming Fidelity Investments and Deere & Co. as co-defendants. The employees complain of the following:
- Excessive Fees
- Indirect fees hidden in the plan structure.
- Undisclosed revenue-sharing.
- Excessive fees assessed on a flat percentage of the assets.
- Failure to inform participants of a “long-standing agreement” with Fidelity to only choose Fidelity funds.
This lawsuit is important because Fidelity manages 401(k) plans for a voluminous number of companies. Here is a nonexclusive list of companies that use Fidelity as trustee and/or record keeper for its 401(k) plan.
- Alliant Techsystems (ATK)
- Rockwell Collins (COL)
- CH2M Hill
- HNI (HNI)
- Thermo Electron (TMO)
- FMC Technologies (FTI)
- Bowater (BOW)
- Valspar (VAL)
- American Azle & Mfg. (AXL)
- Western Gas Resources (WGR)
If you are an employee of any of the companies listed above, you should pay great attention to the assessment of fees in your 401(K). You may have a legal cause of action.
The Employee Retirement Income Security Act (ERISA) requires that 401(K) fees be reasonable, fully disclosed, and incurred solely for the benefit of plan participants. The industry is generally not following this rule. Here are some common problems.
EXCESSIVE FEES: 401(k) accounts are often held for decades and participants make only minimal changes in their fund choices. Thus the high fees of a 401(k) account can deplete significant money from ones retirement savings. USA Today provides an example:
Lets say you have 35 years until retirement, a 401(k) balance of $25,000 and an average 7% return on investments per year. If fees shave a half-percentage point off returns, you’ll have $227,000 at retirement (assuming you didn’t contribute anything past the $25,000), according to the Labor Department. By comparison, if fees cut into returns by 1.5 percentage points, you’d end up with $163,000.
Kathy Chu, 401(k) Fees Can Chomp a Hole in Your Savings, USA Today, Nov. 10, 2006. To find out whether you are paying excessive fees look at your account statement, prospectus, summary plan description (SPD), annual report (Form 5500 series), and summary annual report.
UNDISCLOSED OR HIDDEN FEES: U.S.A. Today reports: “The fees charged in 401(k) plans are all but invisible to investors who don’t know where to look. Making matters more confusing are complex fee arrangements–common in retirement plans–that often lump together administrative and fund–management fees. Regulators are studying whether these arrangements inflate retirement-plan fees by making it hard for you to figure out how much individual services cost.” Kathy Chu, 401(k) Fees Can Chomp a Hole in Your Savings, USA Today, Nov. 10, 2006.
FEES ASSESSED ON A FLAT PERCENTAGE: This is a common problem. The Wall Street Journal reports: “[C]ertain fees (such as those for record-keeping) are assessed as a flat percentage of assets, which means as an investor’s savings grow, more money is being collected from them even though no additional services are provided.” Tom Lauricella, Fund Track: Up for Review: 401(k) Industry, Wall Street Journal, Dec. 28, 2006.
PAY-TO-PLAY ARRANGEMENTS: Some mutual-fund companies that run retirement plans take a portion of the money they collect from investors and use it to pay consultants. The consultants, in turn, recommend which funds are included in a retirement plan. Some consultants recommend only those fund companies that make such payments. That is why these deals are pay-to-play arrangements. The arrangement is basically a kickback.