How To Halt A 401(k) Rip-Off

It’s often difficult to spot a 401(k) rip-off. But it can be even more difficult to stop the pilfering.
Sometimes you have to go to court — for years.
Score one for workers in a recent settlement between Lockheed Martin Corp. and employees who sued the defense company over its 401(k) plan, the fifth largest in the U.S. covering some 100,000 workers and holding more than $26 billion.
Though it has denied wrongdoing, Lockheed agreed to pay its workers $62 million. It’s believed to be one of the largest 401(k) suit settlements to date.
What was Lockheed doing? There were some clear signs that things were amiss in the huge retirement plan.
In a lawsuit filed nearly nine years ago, workers alleged the following:
* The employer was overcharging on mutual fund fees, also known as “expense ratios.”
* An “unreasonably high level of assets” were kept parked in money-market funds, which were yielding close to nothing.
* Middlemen charged “excessive” bookkeeping fees.
* Matching contributions were paid in company stock.
“We are pleased to have achieved this historic settlement for the employees and retirees of Lockheed Martin,” said Jerry Schlichter, Managing Partner at Schlichter, Bogard & Denton, the firm that represented Lockheed employees.
“In addition to the financial terms, the employees and retirees will benefit significantly from the use of competitive bids for services to their plan, reporting to the Court, assuring compliance, a greater degree of transparency, and lower overall costs. This means the company’s employees and retirees can look forward to the opportunity to build very meaningful retirement savings.”
What You Can Do
The lodestone for why this suit was so important — something you can look for in your 401(k) plan — is what the company agreed to in settling the suit.
Is your company doing its job in vetting expenses, which are often too high?
In addition to finding funds or separately managed accounts with the lowest expenses, Lockheed is required to approach at least three bidders for administrative middlemen. That’s a best practice for any employer.
Lockheed was also mandated to keep an eye on how much money is kept in low-yielding income or “stable value” funds.
As I noted earlier, it’s not a simple matter to find out if you’re getting a fair deal in your 401(k).
But if you can do one thing, what would it be?
I would ask your employer to do an independent fiduciary audit of your plan and make the results available to an employee committee. Here’s what the audit should include:
1) Are fees charged in the plan — and to employees — low cost given the size of the plan?
2) Are there embedded conflicts of interest? Does the fund manager also handle administration? You want to avoid that.
3) What are some of the hidden expenses such as “soft dollars” or brokerage commissions or wrap fees? How can they be eliminated?
4) Are the funds within your plan being compared to the appropriate benchmarks? Are they consistently lagging the gauges?
5) Did your employer make every effort to give you a diversified, low-cost plan?
6) What could improve the net return of the plan? Do you have index funds covering every major asset class? Can you eliminate company stock?
What do you do with the report once you have it? Discuss it among your co-workers? Ask your employer to improve your plan and implement suggestions.
And if your bosses ignore you, what then?
Under federal law, you have a right to sue them under ERISA, a federal law that protects worker rights and pensions. Don’t be surprised if that’s what it takes to enact some changes.
Stay tuned, as the court battle over bad 401(k)s is far from over. The Supreme Court will decide a case later this year that involves another 401(k) suit.