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Many employers see the retirement plans they sponsor for their workers as an employee benefit. But once they take on the responsibility for helping to support their employees' retirement, employers have to follow through. If they don't follow the rules, you have the right to seek justice -- and the government is watching over employers' shoulders to make sure they don't short you on your retirement benefits.
Workers at Sunkist Growers found out last week just how effective that oversight can be, as a court ordered the orange grower to restore $1.6 million in losses to their employee benefit plans. According to the U.S. Department of Labor's allegations, Sunkist took money out of their retirement plans to reimburse company expenses, including pay for workers and managers at the company. The Labor Department argued that those payments were impermissible under the Employee Retirement Income Security Act, and the court agreed, issuing a consent order requiring the repayment.
Dealing with retirement risks at work
Unfortunately, workers face many threats to their retirement in the plans that their employers provide for them. Here are just a few:
- A recent study from business-school professors working with the National Bureau of Economic Research found that when mutual-fund companies work as trustees of employers' 401(k) plans, they're more likely to favor their own funds over those of other providers. Specifically, the paper found that 401(k) plan trustees are more likely to add poor-performing funds from their own fund families and less likely to take them off the list of investment options, leaving employees with worse long-term returns.
- Employers don't always use their full bargaining power to get the lowest fees possible. A case involving Wal-Mart (NYSE: WMT ) alleged that the retailer failed to obtain the least expensive fund options from financial institutions, even though the size of its plan would have given Wal-Mart plenty of leverage to obtain such concessions. The case was eventually settled.
- Profit-hungry financial institutions are targeting retirement plans as a major growth driver for their businesses. Three years ago, Goldman Sachs (NYSE: GS ) raised controversy when it sought to increase its share of the employer-sponsored retirement plan market, given its history of questionable practices during the financial crisis.
Is your company responsible?
When companies take on the job of managing a 401(k) plan or pension plan, they have a fiduciary duty to do it well. That means acting solely in the interest of employees and other plan participants, including surviving family members and other beneficiaries. It also means following plan documents, diversifying the investment options under the plan, and paying only reasonable expenses that the plan incurs. If a company can't follow through on those duties itself, it has the responsibility to hire professionals who can -- without imprudently multiplying the fees involved.
What it doesn't mean is that workers' 401(k) balances are guaranteed to go up. Lawsuits alleging breach of fiduciary duty from allowing employees to invest in their own company stock have been quite common over the years, especially when share prices plunged dramatically. Ford (NYSE: F ) and Merck (NYSE: MRK ) are just a couple of companies that faced such allegations as a result of poor share-price performance. Yet in most cases, company stock was just one of many options under the plans involved, and workers deliberately chose company stock over safer options that would have turned out better for them.
Be smart about your retirement
The times when workers could rely on their employers to take care of all of their financial needs in retirement are over -- if they ever existed in the first place. To protect your retirement, you need to watch over your employer to make sure that the retirement-plan options you have available to you meet your employer's fiduciary duties toward you and your fellow workers. Otherwise, you might well find that your best alternative is to take advantage of IRAs and other self-directed investment accounts that let you invest the way you want and avoid any potential problems with unreasonable 401(k) plan options.
Want to retire rich?
If that's the route you decide to go, you'll want to make sure you pick the best investments for your retirement portfolio. Your best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
Tune in to Fool.com for Dan's regular columns on retirement, investing, and personal finance. You can follow him on Twitter: @DanCaplinger.