Chances are, you have a retirement plan at work, and it's probably a defined contribution plan such as a 401(k). After all, Americans have $4.6 trillion in assets in 401(k) plans, according to industry studies.
There's also a high likelihood that you -- like most workers -- don't really know how much you're paying in fees. It's your employer's fiduciary responsibility to protect workers from egregious fees and poor investment choices, and a lawsuit against The Boeing Company is claiming that it didn't live up to its obligations, leaving workers to have paid tens of millions in excessive fees over a decade-long period.
This makes Boeing just one of many major U.S. companies to face big lawsuits over 401(k) plans in recent years, resulting in hundreds of millions in settlements and awards for workers. Let's look at the Boeing case, as well as data about fees and their impact on retirement returns. There's a chance fees are having a much bigger impact on your returns than you realize.
Case against Boeing
One of the notable things about the case against Boeing -- which the parties agreed to settle on Aug. 26, the day it was set to go to trial -- is that the company operates on the of the nation's largest 401(k)s, with 190,000 employees and retirees participating and more than $44 billion in assets. It's also notable that the suit against Boeing was filed in 2006 -- yes, nearly a decade ago, and it's just now being settled -- and the next year, Boeing changed its 401(k) plan, drastically lowering the fees employees paid, according to documents filed in the case.
The lawsuit claims that employees overpaid by more than $34 million between 1997 and 2005, and that in 2005, for example, workers paid $103 each for administrative services for the plan, more than twice what they should have based on industry averages at the time.
Small numbers can add up
On the surface it may seem like these are paltry numbers. After all, the 2006 example is only about $60 per employee, and the $34.5 million in excessive fees is only worth about $180 per worker, if divided equally across the 180,000 current and retired employees the suit covers.
But any retirement expert will tell you that the fees themselves are only a small part of the damage done: It's the missed returns that hurt the most. Jerry Schlichter, the attorney whose firm brought the suit against Boeing, explained it thusly in an interview with National Public Radio: "A 1% difference in fees over a 35-year working career, can have a 28% difference in retirement assets available to that worker. ... It may mean that employee has to extend their work another six or seven years instead of retiring when they wanted to, or their lifestyle in retirement is severely hurt."
Here's an example of how fees can affect your returns:
We're talking about $100,000 less in retirement funds, based on historical market averages and reasonable contribution estimates.
How can you tell if you're paying too much?
The Equal Retirement Income Security Act of 1974 empowered the Department of Labor to oversee and implement rules to hold employers accountable to act in employees best interest, and in 2012 the Department enacted more stringent rules, requiring that employers provide clear and easy access to fees and cost information related to 401(k) plans.
In short, it should be very simple to know exactly how much you're paying in administration and management fees.
You should also be able to easily locate the fees each fund charges. Funds fees are disclosed as the "expense ratio," which is the amount each year the fund managers deduct from the fund's assets to pay expenses. There should also be a "fees" section that discloses whether the fund charges any specific kinds of fees for marketing or other things.
A good rule of thumb: Cheaper is almost always better
According to S&P Dow Jones Indices' SPIVA and Persistence Scorecards, which measure the performance of actively managed mutual funds and the fees they charge against benchmark indexes such as the S&P 500, funds charging higher fees almost never provide better returns. The latest SPIVA scorecard, through 2014, shows that almost 90% of actively managed large-cap funds underperformed the S&P 500 over the past five years. Over the past 10, more than 82% have underperformed.
Furthermore, there's evidence that the best funds rarely remain the best. According to the latest Persistence Scorecard, less than 20% of funds in the top 50% of performance over the past three years managed to stay in the top half. Looking at the top quartile, barely 5% stayed there over the past three years.
What can you do?
If your employer's 401(k) is made up primarily of funds that charge 1% or more in fees, and you have to pay administrative fees on top of that, then you're not getting the best options. But you have to also factor in things such as employer matching funds, which can more than make up for fees. But with that said, you may have ways to encourage your employer, such as an ombudsman, union representatives, or human resources, to get a lower-cost plan with better alternatives for employees. Chances are it won't cost your employer anything extra to move to a lower-cost provider, and it will almost assuredly improve the returns for workers.
It's already happened for Boeing employees. A recent Bloomberg study ranked Boeing's 401(k) No. 2 in the U.S. among the top 50 S&P 500 companies. That may not mean much for retired employees under the old plan, but it's a positive sign that companies can make better decisions to benefit their people. There's a chance that the spate of major lawsuits in recent years is encouraging companies to offer better plans as well.
Just don't just assume your employer is acting in your best interest -- take the time to understand your 401(k). After all, it's your retirement at stake.