What They're Taking From Your 401(k)
Sunday, April 22, 2007
Like 47 million other U.S. workers, software engineer Don Sengpiehl is counting on retirement money invested in a company-sponsored 401(k) savings plan.
But ask Sengpiehl how much that plan costs, and the 54-year-old Loudoun County resident -- who studied math at Massachusetts Institute of Technology -- won't be able to do much more than guess. Disclosures about 401(k) fees bewilder him, and he says he doesn't have the time or know-how to figure out what he's being charged, much less to monitor whether his employer is pushing for the lowest possible fees.
"I basically set it up, put it in motion and hope for the best," he said.
Many workers share Sengpiehl's ignorance about retirement plan fees, even as 401(k)s have become the dominant retirement savings vehicle offered by corporate America. Financial industry executives, consumer groups and federal regulators say that confusing and often fragmentary disclosures by employers and 401(k) managers make it hard for most workers to understand what they're being charged.
Unlike traditional pension plans, in which companies make all the investment decisions and promise a set amount upon retirement, 401(k)s require employees to take more responsibility for how the money is invested -- and therefore how much they will have at retirement. Increasingly, workers and regulators are asking how people can be expected to make wise choices without easier-to-understand, more complete information, especially about fees.
In recent months, class-action lawsuits have been filed against about a dozen big companies -- including Boeing, International Paper and Bethesda-based Lockheed Martin -- claiming that these employers have allowed financial managers of their 401(k) plans to charge excessive fees. In many cases, the lawsuits say, the companies simply have not fully understood which fees were being charged. Federal law requires employers that sponsor 401(k) plans to protect employees' interests, and the lawsuits claim that the companies have failed to seek the best price possible given the services provided.
The companies dispute the charges, and even some retirement experts who favor more disclosure say the suits exaggerate the issue. Thomas Greer, a spokesman for Lockheed Martin, said, "We believe the suit to be without merit. We intend to defend against it vigorously. We do not feel our fees are excessive or out of whack, and we believe that the investment management and administrative expenses associated with the company 401(k) plans are appropriate, fair, reasonable and in line with other major companies'."
The lawsuits have helped focus public attention on the fee issue, as have recent congressional hearings. But the impetus behind both is the large and growing number of people affected. There are more than two workers invested in a 401(k) for every one covered by a traditional pension, the mirror-opposite of 35 years ago, and the Pension Protection Act enacted last summer is expected to accelerate the trend. Designed to encourage Americans to save more for retirement, the new law allows employers to automatically enroll new hires in 401(k)s.
At a hearing before the House Education and Labor Committee last month, several retirement consultants testified that workers are being overcharged billions of dollars each year through questionable and often hidden fees. Disclosure forms are so complicated and incomplete, they said, that even experts have trouble computing all the costs 401(k) investors pay.
The consultants said many 401(k) plans are charging from 1 to several percentage points too much. While that may not seem like a lot, even a slightly higher fee can deeply erode savings over time. The Department of Labor, which regulates 401(k) plans, posts this example on its Web site: If you have $25,000 in savings earning an average of 7 percent annually, with a 0.5 percent fee, your investment will grow to $227,000 over 35 years. Raising that fee by 1 percentage point, to 1.5 percent, will reduce the investment's final value to $163,000.
"We have to ask whether all these fees are necessary, and we have to examine whether they are undermining workers' retirement security," said committee Chairman George Miller (D-Calif.).
Miller said he will consider legislation that would require 401(k) managers to provide better information to employers sponsoring these plans. Employers, in turn, would be required to tell workers more about the plans' costs and risks, as well as about any potential conflicts of interest that money managers or the company might have. The Securities and Exchange Commission and Labor Department are also working on new rules to make disclosures more clear and complete.