Are You Paying Excessive 401(k) Fees?
For most people who work outside the public sector, traditionally defined benefit company pension plans funding a large part of their retirement income are a relic of the past. Instead, these individuals now largely must fund their own retirement nest eggs, supplemented by Social Security. One tax-favored investment vehicle offered by approximately 483,000 businesses to 78 million employees is the 401(k) plan.
A 401(k) plan allows individuals to make tax-deductible contributions from voluntary salary reductions of $16,500 ($21,500 for those 50 and older) per year into a tax deferred investment account. Employers may match employee contributions up to a certain level if they choose. Earnings and investment gains grow tax-deferred. When a participant eventually withdraws funds, he/she pays income tax on the amount of those withdrawals (and a 10% penalty for withdrawals before age 59 ½). If a participant leaves the employer, he/she may roll over the account to an individual personal IRA or perhaps to a new employer’s 401(k) while maintaining the tax-deferred status of the funds.
The employer often hires a third party administrator to oversee the fund. Investment choices within plans can run the gamut from mutual funds, variable annuities, individual stocks, bonds, money markets, pooled Guaranteed Investment Contract (GIC) funds to company stock, among others. Some plans offer very limited investment funding choices coupled with infrequent opportunity to switch investment choices within the plan. Other plans offer a wide range of investment choices with great flexibility to switch investments within the plan.
401(k) plans have become a tremendously important funding source for retirement today and in the future. The generous contribution limits and tax-deferred status enable participants to build up sizeable balances by the time they are ready to retire.
Unfortunately, many plans are not well-managed and cheat participants by charging excessive fees which lower fund performance or by offering inappropriate investment choices. Moreover, many plans do not clearly disclose fees and costs. Plans may have conflicts of interest between fund advisers, administrators, and sponsors of which participants may be unaware. While contributions to your account and the earnings on your investments will increase the amount of retirement income you will receive from your 401(k) plan, fees and expenses paid by your plan may dramatically reduce the growth in your account. According to the U.S. Government Accountability Office, the Congressional investigatory office, even a seemingly small difference in the fees that employees pay can make an enormous difference in the overall size of their 401(k) balances. For example, a 1 percentage point difference in fees can reduce retirement benefits by nearly 20 percent. Excessive fees and poor investment choices which reduce your 401(k) balance may mean you will have to work longer before you are able to retire comfortably, if at all.
If your 401(k) plan charges high fees, has performed poorly, fails to disclose conflicts of interests between the fund sponsor, advisors, or administrators, or offers inappropriate, limited investment choices, your legal rights under the Employee Retirement Income Security Act (“ERISA”) may have been violated. The federal ERISA statute imposes very strict duties on fiduciaries of 401(k) plans and makes them liable in money damages to plan participants if they violate those duties. If you believe that your 401(k) plan has been subject to such conduct, please contact us to discuss your legal options.