Analysis: Latest 401(k) lawsuit highlights ongoing fee concerns

NEW YORK Tue Oct 4, 2011 1:59pm EDT

Donald Froude, President for the Personal Advisors Group at Ameriprise Financial, speaks during the Reuters Global Wealth Management Summit in New York October 3, 2011. REUTERS/Brendan McDermid

Donald Froude, President for the Personal Advisors Group at Ameriprise Financial, speaks during the Reuters Global Wealth Management Summit in New York October 3, 2011.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - While workers can't do much when a stock market sell-off hits their 401(k) balances, they can speak up about poor investment choices and unreasonable plan fees. Now, more are taking those complaints to the courts as they bring lawsuits against employers they believe have allowed poorly-performing and overly-expensive funds into their retirement plans.

The most recent 401(k) fee lawsuit was filed last week against Ameriprise Financial Inc, which bills itself as "America's leader in financial planning." The suit, which was brought on behalf of several employees and is seeking class action status, alleges the financial firm pushed workers into expensive and untested proprietary funds at a cost the lawyers for the employees say is more than $20 million.

It's one of some three dozen lawsuits filed in recent years in the ongoing tussle over 401(k) costs. Experts don't expect those cases - or high 401(k) fees - to disappear anytime soon, even though a rule scheduled to kick in by mid-2012 should give workers much more insight into the fees built into their plans.

"They put people into their products, and they were not vetted and were excessively expensive," Jerome Schlichter, who is representing the Ameriprise employees, told Reuters in an interview. He says the company was "self dealing."

Donald E. Froude, president of the Ameripise's Personal Advisors Group, defended his firm on Monday, while speaking at the Reuters Global Wealth Management Summit. "We feel we've acted appropriately," he said, adding, "This law firm has done several other cases."

Schlicter's firm, Schlichter, Bogard & Denton, has filed many of the class action suits in the last five years. A number of those cases have been thrown out or remain in litigation, but others - notably those against Caterpillar Inc., and General Dynamics Corp. - resulted in multimillion dollar settlements for thousands of employees. "These lawsuits have really helped shine a light on the fact that there are very large plans that have fees that are too high," said Mike Alfred of Brightscope, a firm which monitors and grades 401(k) plans.

In recent years, the down market has focused greater attention on 401(k) fees, many of which are very difficult for workers and even employers to ferret out. A survey released in April by AARP found that more than seven in 10 of plan participants incorrectly reported that they did not pay any fees.

At issue are not just the management fees of the mutual funds held in the plans, but other fees that can be buried in plan management contracts. There can be wrap fees, annuity contract fees and even sales and marketing charges on the mutual funds. Alfred contends that large companies, in particular, have the muscle to negotiate low per-participant management costs and very low-fee investment options for their workers.

Those fees can keep 401(k) management costs down for companies, but their effect on workers' retirements can be significant. A worker with a $25,000 balance in her 401(k) account, who earned 7 percent annually and paid 0.5 percent a year in fees would have $227,000 saved after 35 years. If an extra 1 percent in fees were drained out of her account every year, she'd only have $163,000 at the end of that period, according to an estimate published by the Labor Department.

Beginning in May, 2012, companies will have to disclose far more information about 401(k) fees to their workers, under rules issued by the Labor Department.

But workers shouldn't wait for that, says Alfred. He suggests that a first step can be checking out your company's plan at his firm's web site, Brightscope.com. (There, Ameriprise logged a "grade" of 76 - about average for its peer group. The average 401(k) participant in the plan is missing out on some $50,600 in lost retirement savings because it's not a top plan, according to the Brightscope calculations.)

Workers can also ask their human resources departments for a breakdown of their 401(k) fees, and find out how plan chores - such as recordkeeping - are paid for. Employers may not have all of that information at the ready, but will be required to by May, 2012.

(Editing by Ashleigh Patterson and Beth Gladstone)

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Comments (3)
scarr34 wrote:
If your plan’s menu of stock and bond funds to invest in does not include passively managed funds (index funds) you’re getting a raw deal from your plan. The majority of people’s stock and bond fund holdings should be index funds. Actively managed funds usually do not add value over the long run–their allegedly better performance relative to an index fund does not cover the higher expenses.

Oct 04, 2011 4:14pm EDT  --  Report as abuse
JimsZ wrote:
Better yet, see if they have some sort of Personal Choice such as Schwab offers (this is who our plan is through). I lost over half my 401k value due to mismanagement and the 2008 problem. After 2008 I took over myself, studied/read stocks & charts and now have tripled what I had at the end of 2008. My performance is now 17% annualized rate of return while those “plans” offered would have given me anywhere from negative to the top of 4.7% annualized. Who better to trust with your money than youself?

Oct 04, 2011 7:17pm EDT  --  Report as abuse
tmc wrote:
And financial people wonder why we march on Wall Street? We just want you to do the right thing. If corporations are people too, then they must have the same morals and ethics that Americans believe in. Otherwise we’re going to deport your asses.
Anger is building and you can’t stop it this time. Freedom of the press may belong to those that own one, but we have other means of communication now. Wall street should be very scared.

Oct 05, 2011 5:49am EDT  --  Report as abuse
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