If your 401(k) is a little cheaper these days, make sure you thank your former co-workers.
A recent report from the Center for Retirement Research at Boston College found that a rash of lawsuits against employers in recent years is causing companies to rethink their fund offerings and push for lower fees.
“These lawsuits aren’t brought by the Department of Labor, but rather by former employees,” said Geoffrey T. Sanzenbacher, associate director for research at the Center and a co-author of the report.
“This is the most interesting thing: The plan sponsor — the employer — is the one who is really liable, even if they don’t know the most about the plan,” he said.
Here’s how a flood of litigation may have helped you save a few bucks at work.
The Labor Department has two sets of fee disclosure regulations: One compels fiduciaries (your employer in this instance) to spell out expenses to participants, while the other requires service providers to diulge fee details to employers.
Although the federal agency doesn’t necessarily specify a cost for plan services and investments, it does require that employers document their selection process and make prudent choices.
Lack of specific guidance from the Labor Department means that employers may not be aware that they’re violating the rules until either the agency pursues them or they get hit with a lawsuit, according to the Center for Retirement Research report.
See below for a graph depicting the number of lawsuits surrounding 401(k) plans.
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The Center for Retirement Research report identified three key areas of retirement plan litigation:
- Inappropriate investment choices: This includes allegations that an employer kept an underperforming fund in its menu despite a track record of poor returns. Employees have also made this accusation when employers include their own stock in the plan and it founders.
- Excessive fees: Employers aren’t expected to benchmark actively managed funds to passively managed funds, but they ought to compare their funds’ fees to those with other similar characteristics, according to the report. Fiduciaries who choose costly retail share classes when a cheaper institutional share class was available may face legal action or enforcement from the Labor Department.
- Self-dealing: This allegation is more common in cases involving financial services firms, referring to instances in which employers direct employees to their own expensive and poorly performing funds.
Changes following litigation
In the wake of heightened legal action around 401(k)s, employers have adjusted their retirement plans for a win-win: lower fees for employees and reduced litigation risk.
Mutual fund costs have been falling for plan participants, going to 48 basis points in 2016 from 77 basis points in 2000, according to data from the Investment Company Institute.
During that same period, expenses for recordkeeping services — which include tracking workers’ investments and managing withdrawals — fell to 46 basis points from 57 basis points, the Center for Retirement Research report found.
Further, fee-conscious investors poured assets into index funds. The chart below shows the overall percentage of retirement and nonretirement assets invested in index funds from 2001 to 2016.
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Source: cnbc.com | Original Link