Lawsuits Will Force Probes Into 401(k) Expenses
Steve Lansing has found that the service providers of many 401(k)-like plans overcharge participants and employers, some by 100 percent or more.
As president and founder of Orlando, Florida-based Sentinel Fiduciary Services Inc., Lansing works for employers and their investment committees to trim mutual-fund and administration expenses from large 401(k) and 403(b) plans.
"It's pretty easy to find plans that have been charging excessive fees," says Lansing. He says he has seen numerous examples of third parties claiming their services are "free" or "negligible" when they are simply passing along their fees to participants in the form of higher annual expenses on funds within the 401(k)s.
When a new wave of lawsuits recently alleged that large employers were paying too much for plan expenses, Lansing wasn't surprised, saying the lack of transparency has given middlemen cover for the fees. As a result, the suits are now forcing employers to take a hard look at how much their 401(k)s are being charged.
"I was auditing an $820 million 401(k) for a manufacturing company with about 10,000 participants," Lansing adds, "and the administrative costs alone were more than $250 per person when they could have gotten the same services for $60 to $80 a head."
While Lansing wouldn't disclose the name of his client because it could make the company vulnerable to legal action, it's clear that companies are keen to avoid liability for the ravaging impact that middlemen's fees have on retirement funds.
Wave of Lawsuits
St. Louis attorney Jerome Schlichter is spearheading litigation that could force some much-needed sunlight on the opaque world of 401(k) fees.
Schlichter's firm filed civil suits on behalf of employees within the retirement plans of Boeing Co., Caterpillar Inc., Exelon Corp., General Dynamics Corp., International Paper Co., Kraft Foods Inc., Lockheed Martin Corp., Northrop Grumman Corp. and United Technologies Corp. All told, the complaints cover at least 400,000 workers, a small piece of the more than 45 million Americans who have about $2.4 trillion invested in 401(k) plans.
The litigation, which is still unresolved, alleges the employers entered into largely undisclosed revenue-sharing agreements between fund managers and third parties who administered the plans. The companies, which defended their 401(k)s, were all contacted and have either said the suits have no merit or have refused to comment further. Bechtel Group Inc., which was also sued, stated: "We intend to aggressively defend this matter."
Calling the fees "the big secret of the retirement industry," the suits claim that employees had no knowledge of the "excessive and unreasonable fees" or how much these costs were diminishing their retirement funds. Schlichter said the object of the suits was to make "the plans and participants whole and to make the plan fiduciaries protect the participants."
What is a legal and prevalent practice in the industry splitting and sharing lucrative revenue from retirement plans is a little-known and largely hidden transaction.
In what is unfolding as a new era of disclosure, employees will discover that several third parties are reaping profits and passing along their expenses in the form of higher annual expense ratios on 401(k) mutual funds. That reduces total investment returns.
Brent Glading, a Montclair, New Jersey-based plan fiduciary consultant who audits and works to reduce 401(k) expenses, estimates that profits on 401(k)s "typically range from 50 to 500 percent, but that is not typical of most plans out there."
"If you were to look at all 401(k) plans, most don't generate large profits because most smaller plans have a broker attached to them; therefore a large portion of the revenue is paid to the broker in commissions."
"Many employers take an ostrich reaction," Glading says when he tells them they are paying two to three times too much in administrative and investment fees. "They don't want a fiduciary consultant to come in and tell them they have problems."
Are you paying too much for your 401(k)-type plan, which includes 457s and 403(b)s? Here's how to tell:
An independent audit of your plan by a fiduciary who legally only represents you and your employer is essential. This person works for a flat fee and receives no commission from fund managers or administrators.
The consultant can benchmark your plan and tell your employer how to save money. In most cases, the savings can be rebated to your account. Brokers or those who share revenue can't provide this service without facing huge conflicts.
More Savings Possible
Does your employer provide institutionally priced index- or exchange-traded funds or trusts? They should, because you may be paying individual management expenses of 0.10 percent annually or less. Recordkeeping and other administrative costs could add as little as 0.17 percent a year. What are you paying?
The results of your plan audit are likely to produce some savings, which can be redirected into your retirement fund.
Request an independent audit today. It shouldn't require a lawsuit, since all employers are legally compelled to prudently manage your retirement funds at a low cost. Talk to your chief financial officer or plan administrator.
"All of the revenue-sharing money paid to intermediaries by the mutual-fund companies doesn't belong to the vendors or fund managers; it belongs to participants," Lansing says.
While there's no crime in paying middlemen, any surplus generated beyond a reasonable amount from your plan has been on the table a long time. It could be working for you instead of funding the retirement of someone you have never met and probably never knew existed.
(John F. Wasik, author of "The Merchant of Power," is a Bloomberg News columnist. The opinions expressed are his own.)