Employer-sponsored 401(k) and 403(b) defined contribution retirement savings plans are the predominate source of retirement income for most working Americans. Many of these plans charge fees that are too high or offer inappropriate investments choices to their participants.
The impact of excessive fees or underperforming investments on your account is significant. For example, if you make $60,000 per year, excessive fees of just 1% in your retirement plan can cost you $170,000 or more over the course of your career. That can mean your future monthly retirement income will be reduced by up to 9%, the equivalent of one full month of income each year you are retired. If you are concerned that your 401(k) or 403(b) plan may be mismanaged, contact FDAzar HERE.
Most 401(k) and 403(b) defined contribution retirement plans are governed by ERISA, a federal law created to protect employees and their retirement plans. ERISA imposes certain duties on plan administrators, sponsors and others whose responsibility it is to manage retirement plans. Those duties include minimizing fees and choosing and monitoring appropriate investment choices for the benefit of the plan participants. Federal law allows plan participants and their beneficiaries to recover their damages and obtain other relief if their plan has been mismanaged.
Most people trust their plan administrators to negotiate reasonable recordkeeping and administrative fees for their plan. However, plan administrators often do not perform proper due diligence to negotiate the best options for their plan. For example, many plans agree to pay a percentage of plan assets each year for routine administrative costs such as recordkeeping, which should be available at a fixed rate per plan participant. As a result, plan participants with higher balances may pay five to 10 times more that plan participants with low balances for exactly the same services.
Often plan administrative fees are paid through a process called revenue sharing. Revenue sharing means that a portion of the operating costs of the mutual funds are paid to the plan’s recordkeeper to allow those funds to be offered to the plan. As a plan participant, it is often difficult to determine what fees are being paid to whom and whether those fees are reasonable. However, the bottom line is every fee charged reduces the return on your investment, which in turn reduces the amount of money you will have to enjoy your retirement.
Many small retirement plans work through a broker to find an administrative services provider. Often these brokers are paid an annual commission based on a percentage of plan assets either directly by the plan or indirectly by the plan administrative service provider. These fees may be added to the operating costs of mutual funds or charged directly to plan participants. For example, a plan administrator may charge 1% of net plan assets for its services, then pay the broker one-half of that amount. Either way, the plan participants pay and realize a lower return on their retirement savings as a result.
Many plan administrators do not understand how mutual funds work. A mutual fund with the same managers making the same investments may charge higher management fees to small “retail” investors and a significantly lower rate to institutional investors such as retirement plans. This means an investor in the retail share class will realize a smaller return than an investor holding an institutional class share of exactly the same fund. Many plan administrators continue to choose retail class mutual funds to offer to plan participants even though the plan is eligible to offer institutional class shares.
Another common problem is that plan administrators offer only actively managed mutual funds and don’t offer passively managed index funds. Actively managed funds are funds which try to beat their benchmark through constantly trading securities. Large financial institutions which sponsor the funds like actively managed funds because their operating costs are higher, which reduces the net return of the fund but increases the profits for the fund sponsors and managers. However, less than 10% of actively managed funds actually outperform their benchmark. By contrast, index funds generally invest in securities that will mirror the performance of the fund’s benchmark, such as the Standard & Poor’s 500 or the Russell 1000. Because the operating costs are lower, the fund’s return will more closely match the performance of the chosen index, often outperforming the actively managed funds.
So who profits when plan participants pay high administrative fees and invest in retail share classes and actively managed funds? The answer is the large financial services companies that provide services to the plans and manage the mutual funds offered by the plans. These companies advertise extensively to attract retirement assets so they can make enormous profits by managing that money. These companies charge asset-based administrative fees as high as 1.5% to small plans to track the participant accounts in addition to offering their high cost proprietary funds to plan participants.
FDAzar has taken on large companies to help people recover what has been wrongfully taken from them for over 30 years. We are currently reviewing 401(k) and 403(b) retirement plans to see if the fees are reasonable and the investment choices are appropriate. We are also investigating large retirement plan service providers to see if they are taking advantage of small and unsophisticated plans by charging excessive asset-based fees. We are interested not just in recovering the money you may have lost due to these excessive fees, but preventing future losses for you and others like you.
Our experienced team of class action and ERISA lawyers is ready to help you fight for your ERISA rights so you can realize the retirement you deserve. The consultation is free, the investigation is free, and if there is NO RECOVERY THERE IS NO FEE! If you are concerned about your retirement plan, contact us HERE.