What do you call it when someone you don’t know takes a lot of money out of your retirement savings? 401(k) fees.
Yes, that’s right. We all assume that the brokers we hire to manage our 401(k) or 403(b) retirement plans will charge reasonable fees for their efforts. After all, they too need to keep the lights on. But the truth is, sometimes those expenses are excessive, and that’s getting numerous retirees and plan administrators into a lot of trouble.
Not too long ago, the NY Times highlighted this issue in an article, Finding, and Battling, the Hidden Costs of 401(k) Fees. The piece details how a particular retired employee, Ronald Tussey, had always assumed that his company, ABB Inc. took all the necessary precautions to protect his retirement nest egg. That’s why he never gave it a second thought.
Then, one day he watched a TV special on the devastating effects of excessive fees on retirement savings. So he hired a lawyer, who in 2006 filed a class-action lawsuit against ABB and its plan administrators.
It’s now a landmark case that should give every plan administrator pause. Why? As the NY Times explains:
“Like many employees, Mr. Tussey, now 70, was told that his retirement plan was ‘free,’ even though middlemen were deducting expenses from his savings.
In many retirement plans, a significant amount of future retirees’ funds are devoured by fees. According to a 2012 study published by the progressive think tank Demos, high 401(k) fees can drain $155,000 from an average household over a lifetime. Higher-earning households can lose even more — up to $278,000.”
That’s a lot of money by any standard. Can you blame folks for getting angry?
As it turns out, lots of people around the country may have watched the same TV show as Mr. Tussey. Since 2006, over 30 class-action lawsuits have been filed against 401(k) plans and employers.
In 2012, a Federal court ruled that ABB and its record keeper had violated their fiduciary responsibility to its employees, ordering the company to pay $13.4 million to its employees, and slapping the broker with a $1.7 million fine. That’s on top of six years of legal anguish and fees!
And there’s no end in sight; the ABB, Inc. case is still working through the court system.
Clearly, plan administrators want to do right by their employees, and spare their companies the devastating costs of fighting class-action lawsuits. To do so, one must read the fine print of the plan document and governing contracts, which are admittedly dense and difficult to understand. And it means working with a financial advisor who accepts fiduciary responsibility along with you.
If there’s one lesson all plan administrators should take away from the travails of ABB, Inc. it’s this: If you don’t know how the fees you pay for your 401(k) or 403(b) plan compare to your peers, you’re at risk.
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