Most employees aren't given a choice when it comes to their 401(k). They can't pick the vendors and are rarely involved in vetting the funds within them. It's a hard luck story for nearly 90 million Americans.
Many plans cost too much, offer poor funds or are just badly designed. Some employees are able to get some changes if they are informed and know how to approach their employer. But millions are stuck and may have to sue their employer for a better plan.
The reasons to sue are simple: Your employer won't offer a low-cost, diversified plan. They may stick you with middlemen fees that eat into your retirement kitty. Since there are literally hundreds of companies competing for your employer's business, there's no excuse to offer a shoddy plan.
Hundreds of thousands of employees have sued over rotten 401(k) programs. Many of them have won settlements in recent years. The latest suit to be settled involved the Boeing Company. Gary Spano and a group of other Boeing employees sued the company over high fees and poor design that was hurting them in their effort to save for retirement.
The key allegation in the suit was that the company "breached its fiduciary duties" when offering the plan. Translated from legalese, it means that company didn't protect its employees from bad practices and middlemen fees that plague so many plans.
As part of a $57 million settlement, the company will pay employees through a special fund and agreed to hire an independent consultant to set up a better plan. The company had defended its 401(k) practices in the past.
What can you learn from this suit and more than a dozen others that have either settled or are winding their way through the court system? Here are some guidelines:
* Is Your Employer Managing Risk Prudently?
This means offering a wide range of stock and bond funds that cover global markets. They should offer passive index funds, which are low cost and cover broad baskets of securities. They should also avoid highly risky "sector" funds (Boeing offered a technology) that concentrate market risk in one industry or country.
* Are They Auditing Your Plan to Lower Costs and Improve Fund Selection?
By "auditing," I don't mean returning to the same fund companies and administrators. They should be regularly putting the plan out to bid to get better vendors. They don't even have to vet funds themselves. They can hire an independent fiduciary, a company that has no financial stake in fund selection, to design the best plan. That's what Boeing was ordered to do by the court in its settlement.
* Is the Company Discouraging Stock Ownership in their 401(k)?
Offering company shares through a 401(k) is a bad idea and only a handful of companies still do this. Why? It concentrates risk in one company -- yours. While you may think you understand the inner workings of your employer, you have no idea what the future will bring. A diversified portfolio is better than making one bet on one stock.
* Is the Company Allowing Revenue Sharing?
All too often, a fund company will pay a middleman a percentage of its fund expenses to get into a 401(k) program. While this practice is legal, it digs into the pockets of employees. I think it should be banned. But you'll need an independent audit to see if this is a problem. The solution is simple: Have your employer find a company that will not pay revenue sharing.
So how do you know if your 401(k) is worth suing over? Benchmark it. See how it compares to plans of similar size. Does it offer the same features? Are most fund costs below 0.50% annually? Use this thumbnail from 401khelpcenter to get you started.
