401(k) Lawsuits Will Change Retirement Savings

401(k) Lawsuits Will Change Retirement Savings

ETFs stand to benefit from improved transparency, fueling lawsuits by employees.

Reviewed by: Drew Voros
Edited by: Drew Voros

Not that long ago, before I came to ETF.com, and shortly after the financial crisis delivered its wallop, I had a discussion with a newspaper co-worker about fees associated with his 401(k) account.

The discussion centered on the actual fees being charged, fees he did not believe existed. He told me hadn’t ever seen a “fee” on his statement. I couldn’t convince him that he had to earn 2% a year to break even on a particular mutual fund.

In the financial service industry, the idea of no-fee securities in a 401(k) plan might be laughable. But in the real world then, disclosure of expense ratios and fees was a murky as a foggy day in San Francisco.

That discussion has always stuck with me. This man was a well-educated professional who had not just fallen off the beet truck. I wondered how prevalent that perception was.

Then Came 401(k) Transparency Rules

Fast-forward a few years to 2012, and lo and behold, the U.S. Department of Labor passed new rules requiring better transparency of fees when it came to 401(k) plans. When I read of this, I really wanted to track down my former co-worker.

Maybe the financial crisis brought this to be. Before then, if the fees were not in the brochure that the plan administrator circulated or spelled out on a statement—which was not a requirement—few ordinary 401(k) investors would dig through a prospectus’ legalese to find them, much less if they believed they didn’t exist.

The DOL’s final fact sheet on the rule(s) addressed what should have been there from day one:

The rule will ensure: that workers in this type of plan are given, or have access to, the information they need to make informed decisions, including information about fees and expenses; the delivery of investment-related information in a format that enables workers to meaningfully compare the investment options under their pension plans; that plan fiduciaries use standard methodologies when calculating and disclosing expense and return information so as to achieve uniformity across the spectrum of investments that exist among and within plans, thus facilitating "apples-to-apples" comparisons among their plan's investment options; and a new level of fee and expense transparency.”

Fee Awareness Has Been Heightened

I will never know if my former co-worker got the message, but millions of workers participating in these plans have heard it loud and clear. That’s why four years later we are seeing a spate of lawsuits where employees are suing over inflated fees associated with their employers’ defined contribution retirement plans.

This week, Reuters reported on the latest round of lawsuits:

“Three well-known U.S. universities, MIT, New York University and Yale, have been accused of charging millions of dollars in excessive fees to participants in their retirement plans, according to federal civil lawsuits filed on Tuesday. The complaints against the three universities accuse them of breaching their fiduciary duties by causing the plan participants to pay millions of dollars in unreasonable and excessive fees for record keeping, administrative and investment services.”

Earlier this year, Disney workers did the same, as did workers at Edison, Intel, Anthem, Verizon and Chevron.

And more ironically, financial service companies have been sued as well, firms like Franklin Templeton, Neuberger Berman and smaller firms like Cetera Advisor Networks have been sued for self-dealing their products with excessive fees—the irony of course being that these workers may have been selling the same products they were suing over.

How ETFs Can Benefit

The transparency rules and this year’s proposed change in the fiduciary standard by the DOL—which awaits approval from Congress—can only benefit the ETF industry. Whether it be 401(k) plan administrators or financial advisors helping working with investors, fee consideration has never been more important.

The bottom line is that ETs are cheaper than mutual funds (see: Why Are ETFs So Cheap?). Beyond what are the purported operational issues in implementing ETFs into a 401(k) plan, these lawsuit are going to force 401(k) plan administrators and advisors to make a conscious decision between ETFs and mutual funds, whether it be for retirement or just investing.

These types of lawsuits beget others like it; you can expect the legal snowballing to accelerate. That’s good news for the ETF industry.

Drew Voros can be reached at [email protected].


Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at etf.com and ETF Report.