Excessive Fees in Employee Retirement Plans

Wichita, KSWith much of the media focused on financial scams and lawsuits involving large sums of money, it might surprise people to know that even small employee stock options plans can be hit with lawsuits. The truth is that employee savings plans and employee stock plans are subject to the Employee Retirement Income Security Act (ERISA) of 1974, meaning that if the plan's managers do not act in the best interests of plan participants, then plan participants may have cause to file a lawsuit.

According to an article in The Wall Street Journal (online.wsj.com, 7/14/09), trustees for a sports medicine practice filed a lawsuit related to the fees charged for a 401(k) plan. The lawsuit was filed on behalf of the plan's 27 participants against several defendants, including Charles Schwab Corp., alleging the plan's fees were too high.

The article notes that when the plaintiffs hired new plan providers, their fees dropped by almost $12,000, making a strong case for their claim that the plan's fees were excessive. Furthermore, the lawsuit alleges that only high-cost mutual funds that paid fees to the defendants were included in the plan.

Although plan participants may not realize it, fees can add up over the life of a 401(k). According to Christina Couch, writing for cnbc.com (7/13/09) even a difference of only 1 percent in fees can add up to a 25 percent reduction in savings over 35 years.

"Under the Employment Retirement Security Act (ERISA), plan managers are required to monitor administrative costs, which include recording keeping, accounting activities, and legal services," writes Kevin Mooney for washingtonexaminer.com (7/15/09). This means that plan managers are responsible for ensuring that fees charged to a plan are not excessive.

With people losing money in their investments, it becomes important that they not also lose money to unnecessarily excessive fees associated with their employee stock plans and 401(k)s. However, this requires that plan participants be able to understand fee disclosures, which can be tricky.

Legislation that requires 401(k) plans to provide easy to understand fee disclosures has been approved by a House panel. The bill, called the 401(k) Fair Disclosure and Pension Security Act must now be passed by Congress. According to The Wall Street Journal (online.wsj.com, 42/06/09) the proposed law would require investors be made aware of what fees their 401(k) is being charged in an easy to read way, including having the fees separately listed and categorized by their nature: administrative, managerial or transactional. Furthermore, the bill requires full disclosure of potential conflicts between the investors' interests and their employers' interests.

However, until this legislation passes, employees are left to determine for themselves whether or not their 401(k) charges excessive fees.