Even savvy investors might not realize it, but hidden processing fees could quietly bleed thousands of dollars out of their 401(k) funds. And when employees discover they’re out of that money, lawsuits soon follow.
Six employees in New York and Illinois are suing Hartford-based United Technologies Corp. for failing to disclose fees that siphoned out earnings. Other major companies touched by similar suits include Boeing, Lockheed Martin and John Deere Co.
The lawsuit charges that UTC, which provides its 401(k) plans through Fidelity Investments, failed to fully disclose the fees associated with employees’ accounts.
The suits are based on a pension protection act that requires plan providers to find the best savings and investment options for employees, and to keep them informed of all related fees. Lawyers for the employees maintain UTC violated the act by withholding information about how much money employees lost to fees each year.
Since employees control their own accounts, those fees can misrepresent potential earnings and leave employees without information to make investment choices.
Peter Murphy, spokesman for UTC, said that contrary to the claims in the suit, “every document associated with that plan is accessible through Fidelity online,” he said. “We believe the plan is totally transparent.”
But industry experts are paying close attention to what happens with cases like those against UTC, which could open up new legal pitfalls for 401(k) plans.
Many legal and financial experts warn too many employees are in the dark.
“Nobody’s aware of (the fees),” said David Scott of Colchester’s Scott and Scott. “That’s the problem – by their very nature, they’re difficult to discover.”
David Snetro, senior vice president of Westport-based RDM Financial Group, said fees are often deducted from a participant’s account balance so the employee doesn’t see the deduction.
A bevy of different fees cover expenses such as producing statements or managing the funds. UTC’s Fidelity partnership, for example, requires various records-keeping fees that cost employees an average of $25 each last year. Other expenses vary with each participant’s plan.
Even small fees can eat big chunks of possible savings.
In a March report, the U.S. Government Accountability Office said that a single percentage point difference in fees for a $20,000 account balance can reduce payouts by nearly 20 percent over two decades.
Susan Mangiero, president of Trumbull-based research company Pension Governance, said more regulatory agencies are looking to more sharply define rules on 401(k) disclosure.
“There’s definitely momentum building to get more disclosure in place,” she said.
Congress is getting involved, too. Last month, the House labor committee introduced a bill requiring disclosure of all fees “in clear and simple terms.”
The bill would give Department of Labor more reach in overseeing such plans.
Scott said that the current law puts the onus on plan providers to give their employees the best options and keep them informed as possible.
If employees aren’t made fully aware of the deals they make, he said, anger over lost money might become a big problem for employers.
“It doesn’t take long to follow that the litigious side of the industry will get involved,” he said.
