Investors in 401(k) plans may be losing thousands of dollars to Wall Street without even knowing it. Most employees who participate in 401(k) plans are aware of the percentage of income they are setting aside each month for retirement. Very few employees, however, know what percentage of their savings Wall Street takes for itself in the form of so-called “asset management fees.”
If the fees are too high, employees may have a viable cause of action for breach of fiduciary duty under ERISA.
At first glance, these fees appear insignificant. For actively managed mutual funds, the fees are normally anywhere between one and two percent. But over the course of an investor’s lifetime, these fees add up to big bucks. According to a report aired in April on PBS’s Frontline, a 2% asset management fee will easily amount to well over six figures over the course of an employee’s lifetime. Adding insult to injury, studies show that actively managed funds perform on average no better than low-cost index funds.
401(k) plans and similar types of retirement accounts hold over $3 trillion in total assets for an estimated 72 million Americans. Given the huge amount of money at stake, it is not surprising that Wall Street investment firms have set their sights on retirement plans.
To protect retirement savers, Congress enacted the Employee Retirement Income Security Act (“ERISA”) in 1974. This law imposes a fiduciary duty on companies to act in the best interest of their employees in the management and administration of benefit plans. Under ERISA, if a company with a 401(k) plan fails to negotiate for reasonable fees from the mutual fund companies that provide investment options to the plan, the company may have breached the fiduciary duty it owes to employees.
In response to the excessive fees charged by many 401(k) plans, a new wave of class action lawsuits is working its way through the federal court system. In one such case, Braden v. Wal-Mart, the participants in Wal-Mart’s 401(k) plan alleged that Wal-Mart breached its fiduciary duty by failing to offer low-fee, institutional-class mutual funds. Wal-Mart instead offered high-fee mutual funds that were intended for ordinary retail investors. Under a settlement agreement, Wal-Mart and the plan’s mutual fund provider, Merrill Lynch, agreed to pay $13,500,000 in damages to participants in the plan.
In another excessive fee case, Tussey v. ABB, a federal judge awarded over $50 million in damages and attorneys’ fees to employees of ABB, a large manufacturer of power generation systems. ABB had hired Fidelity Investments to offer mutual funds for the company’s 401(k) plans. The judge ruled that ABB breached its fiduciary duty by failing to adequately monitor the asset management fees that Fidelity charged plan participants.
Although companies are required by federal law to closely monitor 401(k) fees, many employers are asleep at the switch. Participants in 401(k) plans should regularly review the fees charged by each investment option. If the fees are too high, employees may have a viable cause of action for breach of fiduciary duty under ERISA.
About the Author
Greg Coleman is the founder and Managing Partner of Greg Coleman Law P.C., located in Knoxville, Tennessee. Mr. Coleman's practice focuses on products liability, ERISA, medical malpractice, and personal injury cases. A champion of worker's rights and an experienced trial attorney, Mr. Coleman has handled complex ERISA class actions involving large corporations that eliminated or reduced health care benefits for retirees.