Good news for anyone with a workplace retirement savings plan, the U.S. Supreme Court is expanding your rights to sue over excessive fees in your 401(k) plans.
In a unanimous decision, the high court ruled that employers have a responsibility to continually monitor appropriate investments and protect workers from funds that are too expensive – costing savers thousands of dollars over their investing career.
Under the Employee Retirement Income Security Act (ERISA), retirement plan sponsors have a fiduciary duty to act “with the care, skill and prudence and diligence” that a judicious person would use in a similar situation. In the case of Tibble v. Edison, 20,000 employees at Edison International sued the firm arguing that it breached its fiduciary duty by selecting high-cost shares of funds, instead of lower-cost options.
The landmark ruling comes as the Department of Labor is preparing to rule on a proposal that would require financial advisors to practice under fiduciary standards when advising clients on other retirement investments.
Bottom Line on Minimizing 401(k) Fees
While the ruling is certainly a wake-up call for employers to improve their retirement plans, it’s also imperative for employees to pay close attention to fees because no matter how generous your employer is with helping you save for retirement, your plan isn’t free.
So, what does the Supreme Court ruling mean to your 401(k)?
Greg McBride, chief financial analyst with Bankrate.com says “over time you’ll likely see a greater urgency by your employer to reduce investment expenses and eliminate poorly performing investment options, but don’t expect any immediate change to your plan.”
Why is it important to know the fees associated with your 401(k)?
“Very simply, the less you pay in investment expenses, the more you earn in investment returns,” says McBride. “Knowing the fees can help participants make more informed investment choices in their 401k plans and help keep employers accountable for the investment options offered.”
The U.S. Department of Labor estimates that a 1 percentage point difference on a current account balance of $25,000 will reduce total accumulations by 28 percent over 35 years, assuming average returns of 7 percent and no further contributions.
According to research conducted in 2012 by public policy organization Demos, dual-earner households can expect to pay $155,794 to $277,969 in retirement plan fees over a lifetime.
Where can you find the fees and expenses charged to your 401(K)?
“401k providers send out an annual disclosure of the fees for all of the investment options in the plan,” says McBride.
You can also check the plan website or your quarterly statements to see the expense ratios of the investments offered, as well as contact the plan provider for further detail or explanation on any fees. If you think your plan fees are too high, the U.S. Department of Labor has a 10 question checklist to help you gather information about the fees and expenses paid by your plan.
What should you do if 401(k) plan fees are too high?
McBride recommends lobbying your employer for lower cost options, particularly index mutual funds. But bear in mind that one of the key variables to the fees you see is the size of your plan. “Larger companies with more participant assets in the plan can negotiate for better terms than smaller plans can, as the administrator has fewer participants over which to spread the cost,” states McBride.
“401k plan trustees and fiduciaries should regularly monitor the performance of the investment options in the plan; negotiate for lower participant fees particularly as the plan grows in size, and comparison shop among other providers in the marketplace to see if a better option exists for the employees.”
Saving for your retirement can be challenging and every dollar counts – so ensuring you have as much as possible by limiting fees is essential in meeting your goals.
What steps have you taken to cut down on costly retirement account fees?