4 ways you could be getting shortchanged on your 401(k)

American workers often fail to scrutinize the details of their 401(k) plans — they’re just happy to have one and trust their nest egg will grow. But more lawyers are saying that the guy with the horns and hooves appears if you look hard enough.
Class-action law firms are furiously investigating retirement savings plans offered by a wide range of corporations and nonprofits, including universities. A mounting number of lawsuits against plans allege excessive fees and a lack of attention to plan design: In other words, that sponsors are breaching their fiduciary duty.
That duty means your financial interest comes first. Complaints filed in courthouses across the country allege plan sponsors have tossed that rule aside and are, in some cases, profiting off the backs of employees. The defendants have either denied the claims and pledged to contest the lawsuits, or declined to comment on pending litigation.
Here’s a guide to some of the main allegations — claims likely to be featured in more cases to come.
EXCESSIVE FEES MEAN LESS FOR YOU TO RETIRE ON
Most of the recent lawsuits allege multibillion-dollar plan sponsors didn’t always choose the cheapest share class available. In many cases, they used higher-priced funds designed for smaller retail investors when they had the leverage to negotiate far lower institutional pricing.
In some instances, an identical version of a pricier mutual fund in a plan was available in a far cheaper institutional-priced share class. During the period targeted by a lawsuit against Cornell University’s plan (university plans are similar to 401(k)s but are called 403(b)s), some of the retail-share priced funds had fees of 0.44%. Identical funds priced at the lower institutional rate were available for 0.19%, according to the complaint.
“Cornell University continues to responsibly manage its retirement plans for the greatest possible benefit to employees and retirees, and has been responsive to their interests in having a reasonable range of funds available,” said Cornell’s Vice President for University Relations Joel Malina. He said Cornell will fight the litigation.
Expenses have a big impact on returns. After 25 years, $10,000 invested in a fund with an annual expense ratio of 0.45% and an average annual return of about 6% would grow to $86,840, according to this Vanguard calculator. Slash the expense ratio to about 0.2% and the balance swells to $92,811.
“There’s been a tremendous decrease in fees in 401(k) plans as a result of the litigation we’ve brought, but [we] haven’t seen an accompanying decrease in fees for employees of universities,” said Jerome Schlichter, of Schlichter Bogard & Denton, a litigation pioneer in the 401(k) and 403(b) worlds, and the firm behind most of the recent lawsuits.
TOO MANY INVESTMENT OPTIONS EQUALS POOR CHOICES
In general, abundant choice in a retirement plan isn’t better — it’s just confusing. Lawsuits filed this month against Columbia University, Cornell, Northwestern University, the University of Southern California and others cite investment lineups that, for the periods targeted by the lawsuits, ranged from 120 options (Columbia) to more than 440 (Johns Hopkins University). The universities dismissed the allegations as unfounded.
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Dan Pawlisch, leader of Aon Hewitt’s 403(b) client practice, is co-author of a January paper titled “How 403(b) Plans are Wasting Nearly $10 Billion Annually, and What Can Be Done to Fix It.” In the past, he said, “there weren’t fiduciary committees to monitor funds, and no one wanted to decide what funds to pick, so people just said, ‘Let’s just give participants all the funds.’”
The issue with that strategy? When confronted with hundreds of funds, many investors just shut down. The Aon Hewitt paper said offering a tier of target-date funds, plus a tier of core funds with as few as four to six investment options, can be a good solution.
Some of the investment lineups for the 403(b) plans being sued by Mr. Schlichter — which is almost all of them — have gone down to double-digit lineups of 30 to 40 offerings since the period targeted by the lawsuits. A reasonable number of options for a large retirement plan is around 15, the lawyers contend.
TOO MANY RECORD-KEEPERS EQUALS HIGHER FEES
Plans also cut into employee savings by using multiple record-keepers. A lawsuit filed against the 403(b) plan at Johns Hopkins said that, during the period targeted in the complaint, the plan used five record-keepers and cost plan participants millions of dollars.
Lawyers for the plan participants argued that a “reasonable” record-keeping fee for the plan would be a set amount of between $500,000 and $850,000, or about $35 per participant. It estimated that the plan paid record-keepers at least $4.5 million to $6.1 million per year, or between $225 and $340 per participant, from 2010 to 2015. Aside from adding to expenses for the plan, spreading assets out across so many companies also means plans don’t reach the scale needed to negotiate lower fees. Johns Hopkins rejected the allegations.
COMPANY SELF-DEALING MEANS POOR INVESTMENTS
Some of the recent lawsuits focus on the 401(k) plans of financial-services companies. Those complaints allege that defendants engaged in self-dealing by including their own, sometimes expensive or underperforming mutual funds in employee plans when cheaper options were available elsewhere.
One of the most recent lawsuits leveling self-dealing claims is against the 401(k) plan at brokerage firm Edward Jones. Along with allegations of unreasonable fees, the suit alleges relationships between Edward Jones and the 401(k) plan’s mutual funds were the reason for their inclusion rather than the best interest of the plan participants. “The lawsuit’s allegations that Edward Jones, its affiliates and plan fiduciaries violated their fiduciary duties or engaged in prohibited transactions related to plan assets are not true,” the company said.
Allegations of self-dealing also show up in a lawsuit against Morgan Stanley and its board. That complaint alleges that the inclusion of the bank’s proprietary funds cost employees hundreds of millions of dollars, and that the funds were offered to profit the bank, rather than plan participants. One example the lawsuit cites is a proprietary small-cap growth fund that underperformed 99% of peer funds in 2014 and 94% in 2015. Morgan Stanley said the allegations are without merit.
James Carroll, a partner at Skadden, Arps, Slate, Meagher & Flom LLP who represents defendants, like companies and banks, in 401(k) litigation, sees a problem in lawsuits that focus on short-term fund performance. After all, the conventional wisdom with 401(k)s is to leave them alone and let them grow. “The plaintiff’s lawsuits — aka the what-have-you-done-for-me-lately point of view — focuses on relatively short-term investment performance over three to five years whereas retirement money should be looked at over two to three decades,” he said. If fiduciaries respond to the threat of being sued by moving investments in and out of plans all the time, that’s not helpful to plan participants, he added.
Class-action lawyers, who get a big chunk of any settlement (let alone verdicts), are probably unmoved by such arguments. Also, those payouts and even just the threat of expensive litigation may have more plan sponsors monitoring and managing their plans carefully. But Mr. Carroll warned that “the inevitable conclusion of these lawsuits imposing enormous costs on plans will be corporate action to reduce voluntary contributions.”