Eliminating Excessive 401(k) Plan Expenses

Fees paid by investors to their investment management companies decrease the bottom line. Nowhere is this practice of charging large and unnecessary fees more repugnant than with 401(k)s.

He does not wear a superman suit or even the cape. But, he is impressive nevertheless.

Jerome J. Schlichter is almost single handedly trying to bring money being siphoned off by 401(k) investment management companies back to working Americans.

Fees—transparent or hidden—paid from investors to their investment management companies, decrease the bottom line for the investor. Nowhere is this practice of charging large and unnecessary fees more repugnant than with 401(k)s. After all, this money is what most working Americans count on for their old age.

In my earlier column, I profiled 2 retirees who invested the same monetary amount and received identical returns on their investments but had vastly different nest eggs in 35 years. This was because their investment expenses were different. One was paying a total of 2% and the other 3%. Because of this alone, there was roughly 25% more in the account of the employee paying the lower expenses when he retired. Obviously, this led to the opportunity for a better quality of life for this retiree in his “golden years.”

Paradoxically, this lack of regard for the fees of the employees is not shared by the company executives, who often have a favorable fee status. I can’t describe the details, but I noted this myself when I was assigned to the care of the financial aspects of these plans when I worked at investment companies. Then, it seemed unfair to me. It still does.

And, Schlichter shares this concern. He is suing companies that appear to be remiss in their fiduciary responsibly toward their employees and recently won one lawsuit that has been percolating through the courts since 2006.

Schlichter represented the employees of ABB Company, a business that specializes in power and automation technology. The employees claimed ABB violated its fiduciary responsibility to them by not paying attention to the 401(k) fees they were paying. Thereby, they were higher than they needed to be and diminished the employee’s returns. The fact that Schlichter won the case indicates that they were right.

What is surprising about this lawsuit is not that it was filed—401(k) fees are known to be excessively high. The unexpected aspect is that the court bucked the large company and agreed with the employees. ABB was charged with lack of fiduciary responsibly to its workers because it did not scrutinize its employee’s 401(k) plan’s costs and try to lower them.

This ruling is a red flag to other company 401(k) plans. The same thing could happen to them. Prudent businesses will now be in a defensive position because they know employees can successfully sue the company for lack of fiduciary responsibility.

This means Jerome J. Schlichter started something that could take hold like wildfire.

More employees would be protected from the carelessness of their own employers toward their 401(k) plans. This would mean more money in their pocket at the end of the day and attenuate the numbers of those over 65 ending up in poverty. In turn, that means higher paying taxpayers would be less likely to have their own taxes increased to cover unfortunate workers who could have had more money at retirement if their 401(k) fund fees had been lower.

No wonder Schlichter is a modern-day hero.