401(k) Fees Under the Gun

The issue of 401(k) fees and expenses has been simmering on the back burner of the business world for some time. Now it's threatening to come to a full boil thanks to a barrage of lawsuits filed against several large companies. The lawsuits charge, among other things, that the companies in question, as plan sponsors, allowed unreasonable fees to be charged to 401(k) plan participants, failed to monitor the fees and expenses paid by the plan, and neglected to educate themselves about vendors' fee structures and other fee-related issues.

Although the lawsuits will take years to play out, the economic stakes are potentially enormous. Matthew D. Hutcheson, an independent fiduciary based in Portland, Ore., estimates that total fees and expenses for a typical 401(k) plan range between 300 basis points and 900 basis points annually and that 401(k) plan participants typically are paying at least 200 basis points more than they have to in fees and expenses. If that's the case -- and if the courts determine that plan sponsors could have done more to rein in those expenses and that individual participants' account balances were adversely affected -- the final costs in these lawsuits may be quite significant. And that could lead to a flood of similar legal actions. "I personally believe that these lawsuits have teeth and that they could lead to some positive change in the industry," says Hutcheson. "Positive change means no more games."

At minimum, the lawsuits will bring the issue of 401(k) plan fees and expenses to the forefront and drive plan sponsors to be more aware of what they are paying for and why, if only to be able to answer inevitable questions from plan participants. "These lawsuits are driven by demographics," says Gregory Ash, partner and chair of the ERISA litigation group with law firm Spencer Fane Britt & Browne in Kansas City, Kan. "The baby boomers are getting ready for retirement without a traditional defined-benefit pension plan, so their retirement income will come primarily from their 401(k) plan. In many cases, the amounts in those accounts are less than individuals expected, and they are looking for ways to make up for that gap. Litigation is one of the ways of doing so."