Your Money: Limiting the 401(k) Finder’s Fee

It is an employer’s legal duty, after all, to look after their employees’ interest in overseeing the accounts.

A series of lawsuits making their way through the courts have raised questions about whether employees are being overcharged for the accounts.

Experts say the suits and new federal rules have helped bring the fees down to a more reasonable level, and have prompted at least some employers to adopt less murky fee arrangements that more clearly separate what they are paying for investments and what it costs to administer the plan. But the fees workers pay can still vary widely and be hard to discern.

One recent lawsuit was brought on behalf of employees at Cigna by Jerome J. Schlichter, a lawyer whose success in similar cases has caused some anxiety among human resources executives. His firm, Schlichter Bogard & Denton, has brought 14 similar lawsuits over the last seven years on behalf of 401(k) plan participants. Typically, the suits claim that the employees were paying too much in fees. Several employee benefit experts have said that Mr. Schlichter’s cases and others have resulted in lower charges as other employers began to fear attracting lawsuits of their own.

“It’s unfortunate that it took litigation to focus attention on costs,” said Fred Reish, a lawyer with Drinker, Biddle & Reath in Los Angeles and an expert on the federal law that governs 401(k) plans. “But it clearly has.”

More recently, another force has been putting pressure on 401(k) fees, which typically include investment and administrative expenses. Last summer, the Labor Department started to require the companies that provide 401(k) plans to disclose more details on fees. Given the complex way these companies price their wares, the new rules are making it easier for employers to comparison-shop. (A separate rule required employers to provide more fee disclosures to employees.)

Benefit experts agree that because of the combination of forces, the cost of running and investing in the plans, on average, have been on the decline for several years.

According to BrightScope, a financial research company that tracks 401(k) plans, the total costs, including fees and administrative expenses, were 0.8 percent of assets in 2011. That’s down from 0.85 percent in 2009.

Still, workers can pay a fairly wide range of fees. Many plans cost between 0.2 and 1.8 percent, but some plans, particularly smaller ones, are more costly.

Fees can make a significant difference. According to the Labor Department, paying just 1 percentage point more in expenses over the course of 35 years could reduce a worker’s retirement savings by nearly 28 percent. Consider a worker with a 401(k) balance of $25,000 who earns 7 percent over the next 35 years. If this person paid 0.5 percent in fees, even if she stopped making new contributions, her account would grow to $227,000 at retirement. But if she paid fees totaling 1.5 percent, her savings would rise to only $163,000, or 28 percent less.

That kind of swing has been at the heart of most of the lawsuits brought by participants.

In Mr. Schlichter’s most recent case, a group of 401(k) participants say that Cigna, the employer, charged them excessive fees (Cigna was using proprietary investments for its own employees; that’s legal, but the fees need to be reasonable). On top of that, the workers say that the employer breached its fiduciary duty — in other words, failed to act in the employees’ best interests — when it sold its retirement division to Prudential in 2004.

Instead of shopping around to be sure the workers would get the best rates, their lawsuit says, Cigna lumped the plan with the rest of the assets it sold, and promised Prudential it could continue to manage their money for at least three years, according to court documents.

Cigna and Prudential dispute the lawsuit’s claims, according to a news release issued by Mr. Schlichter’s firm, which is based in St. Louis, and they said the plan had always been appropriately managed. The proposed $35 million settlement, filed in United States District Court for the Central District of Illinois, requires the approval of an independent financial expert and a judge, he said. The settlement would cover all people in the plan — which had more than $2.8 billion in assets as of 2011, with more than 42,000 participants — from April 1999 through May 31, 2013.