Last week, I asked readers if they knew how much their 401(k) plan is costing them. Since then, I've heard from many irate readers who suspect that they're being ripped off.
So far, however, only one guy who has contacted me thinks he's pinpointed how much he's paying.
During the past 16 months, this reader figures he's paid close to $7,000 in 401(k) fees. When he complained to his company about what he considered to be a bloated tab, here's the response he got: "Suck it up. There is nothing you can do about it."
In one respect, this candidate for employer of the year is right. In the 401(k) arena, workers are about as powerful as a bunch of kindergartners storming Chuck E. Cheese. Employees don't get to select the mutual funds that end up in their 401(k) menu and they don't have a say in what their workplace retirement plans cost them. While the employer holds all the aces, it's the voiceless workers who have the most at stake.
And that's why it's infuriating when stuff like this happens all too frequently: A boss chooses his old college roommate, who is a stockbroker, to put together a 401(k) plan for his firm or replace an existing one. The lucky broker is careful to only choose mutual funds that will, in turn, reward him financially. Some of these guys can make tens of thousands of dollars - and in some cases, hundreds of thousands of dollars - a year for pretty much being in the right places at the right times.
And it's the workers who are picking up the tab. Every time they sink money into their 401(k) mutual funds, the worker's investment returns are eroded by higher fees that are assessed, in part, to cover the broker's reward plan.
So what does the broker have to do to justify his windfall? In some cases, not much. Even if the broker does little more than annually entertain the firm's owner with dinner and a round of golf, he'll continue to be paid handsomely year after year.
Employers, however, can't immunize themselves from completely botching their 401(k) responsibilities. Employers, big and small, are supposed to be following the Employee Retirement Income Security Act of 1974, better known as ERISA, that mandates that they act as fiduciaries for their workers' retirement money.
One of ERISA's requirements is that every employer with a 401(k) plan must establish a prudent management process to oversee retirement plan providers. And that means they have to know what the heck is going on in plain sight and under the table.
As part of this oversight duty, an employer needs to know what the retirement plan is costing and where the money is going. In my lucky broker example, it's highly doubtful that the boss understands how much his 401(k) point man is pocketing from the fund fees versus what his expenses are. And this same lack of knowledge can be true for much larger companies that depend on major 401(k) players such as Fidelity Investments, Vanguard Group, T. Rowe Price, Merrill Lynch, Principal Financial Group and Hartford to run their plans.
What a workplace should be doing is monitoring how much cash is being generated for 401(k) expenses and where it is going. Companies should also compare how the costs and the services stack up to other 401(k) vendors. When companies aren't vigilant, it's more likely that workers will be gouged.
"A missing prudent management process will almost always lead to excessive costs," observes Ronald E. Hagan, chief executive officer at Roland/Criss Fiduciary Services in Dallas, which advises workplaces on their fiduciary responsibilities.
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