It's hard to stand up to your boss, especially in a tough economy in which making a fuss can make you a lightning rod for layoffs or other staff reductions. But because some workers have been willing to take a shot and fight their employers over problems with their 401(k) retirement plans, millions of workers around the country may see the impact -- and the tax-favored plans could become a better way to save for retirement.
What's at stake
What most often turns off workers about 401(k) plans is the limited selection of investments they can choose from. Bad investment choices don't just limit your ability to invest the way you want; they can also cost you thousands of dollars over the course of your career in additional fees and other costs.
That's why workers from several companies have sued their employers, alleging that their investment options were too costly. In many of the suits, including those involving Unisys (NYSE: UIS), Exelon (NYSE: EXC), and Bank of America (NYSE: BAC), employers have ended up winning the cases. But as SmartMoney detailed earlier this week, Edison International (NYSE: EIX) had a district court rule in favor of its workers in their claim that Edison's 401(k) fees were too high.
In addition, apparent conflicts of interest sometimes become involved. For example, Ameriprise Financial (NYSE: AMP) currently faces a lawsuit alleging that the company favors its own proprietary funds over lower-cost alternatives with better performance records.
What's changing
Despite only minimal success in court, workers have seen the environment for 401(k) plans start to change. Nearly 30% of large 401(k) plans now let investors go beyond the limited choices of a preferred investment menu to gain access to a broader slate of mutual funds. Plans have started including index funds among their investment options, and new regulations from the Department of Labor will soon give employees more information on how their plans work, allowing workers to understand better how the professionals who run their employer-sponsored retirement plans get compensated and how much of those fees workers end up paying.
The response is similar to what happened following the financial crisis and market meltdown three years ago. With companies from Ford (NYSE: F) to Citigroup (NYSE: C) having faced lawsuits from workers who invested in employer stock in their 401(k)s and subsequently suffered big losses, many employers voluntarily put limits on the amount of money workers could invest in their stock.
How to protect yourself
It's always good when employers take steps to protect their workers from bad financial decisions. But in saving for your retirement, you need to take primary responsibility for your own financial safety rather than counting on your employer to do that job for you.
Doing so requires three simple moves:
- Make sure you know exactly what fees are involved in any investment choice you make in your 401(k). Whenever possible, choose low-fee alternatives.
- Use your other assets outside your 401(k), especially tax-favored retirement vehicles like IRAs, to balance any holes in your 401(k)'s investment options. For instance, if the only good choice in your 401(k) is an S&P index fund, then use outside money to invest in other assets like small-caps or international stocks.
- If you can't get access to good 401(k) investment options, contribute only enough to get whatever matching contribution your employer makes toward your retirement, and then use other accounts for the rest of your savings. You may not get the full tax benefit from your 401(k) that way, but avoiding high-cost investments may well make up the difference.
Sometimes, you have to fight for your rights as a worker. As the economy slowly recovers and employers realize the true value of experienced employees, you may find that you have more leverage than you would think in asking for ways to make the most of employee benefits like your 401(k) plan. With your retirement at stake, taking steps to cut your costs and improve your returns is well worth some effort.
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Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.
