What next? A lawsuit plaintiff against a 401(k) plan sponsor (the employer) went ballistic and shot two people in a courthouse back in Missouri. His was one of the growing number of complaints launched in situations where 401(k) providers were charging investors what knowledgeable financial people would agree was way too much money.
It has taken awhile for my 1995 cover article in Money magazine ("Beware, Retirement Plan Rip-Off") to gain traction, but this may be the year. Apart from well-publicized suits against companies like Boeing and Caterpillar, there are new lawsuits coming out of the woodwork against companies like Wal-Mart and now, Honda USA. Large institutions like Fidelity and Merrill Lynch are typical co-defendants.
Starting this year, the retirement plan government reporting for the 2009 year-end must disclose the entire amount that vendors charged to participants in 2009. There is a box on the form to check if the information from the plan provider is not forthcoming. Next year, this information will have to be shared with employees.
This is all good news for 401(k) participants. In an earlier report compiled last year by the Government Accountability Office, the GAO pointed out that,... even "... relatively small fees imposed annually can significantly affect retirement savings over the course of a career." With 100 percent certainty, an otherwise unnecessary fee of 1 percent will reduce a 30-year accumulation by 25 percent or more. Way to go, GAO! The magic of compound interest works against us when we take fees out of otherwise compounding money. A fraction of a percent adds up to huge proportionate losses.
The logical approach would be for the participant to pay nothing and the employer to pay all costs as a tax-deductible business expense, like Xerox has done for years. Even if the employer elects to pass the cost on to employees directly, this would require the average employee to accept a cut in pay of, say, $200 per year. The cost, in take-home pay, of a $200 gross pay cut would be only about $140 assuming a 35 percent marginal tax bracket. So the employee gives up $140 per year. In return, they can look forward to a retirement benefit 30 years later that will be 25 percent to 50 percent larger. That's assuming the same investments without the annual 1 percent fee charged to retirement plan assets.
What could be more obvious? Yet, it seems to be taking, as they say, "an act of Congress" to shine some light one of the best-kept secrets of the financial services industry. In smaller companies, where most Americans work, it shouldn't be difficult to create this shifting of costs. Furthermore, the primary beneficiaries would be company owners and key managers whose accounts typically make up over half of the retirement plan's assets. It astounds me when these decision-makers are reluctant to explore ways to shift the costs away from own tax-free compounding money.
Comparing the opportunity cost of reduced future assets versus paying with tax-deductible company dollars, is just a no-brainer. Apart from the Machiavellian interests of owners, employees benefit substantially as well. And, wait! There's more! A company owner can sleep at night knowing that the 401(k) is impregnable against those ever-more-popular, fee-related lawsuits --- mostly from former employees we all hoped to never see again.