If you were to do one thing in your 401(k) to make a huge difference for your future savings, what would it be?
Cut expenses by adding passively managed index funds.
As yet another lawsuit against a big 401(k) plan has shown -- this one against Lockheed Martin -- employers who keep overpriced mutual funds in their 401(k)s are breaking the law.
In recent provisional settlement, the defense and aerospace giant agreed to terms that would reduce the cost of the funds within its $26 billion plan covering more than 150,000 participants.
While it remains to be seen how much this lawsuit will impact other 401(k)s, it's certainly another loss for employers who aren't doing right by their employees.
Although Lockheed denied any wrongdoing in the settlement, the complaint said this:
“At best, these fee structures are complicated and confusing when disclosed to plan participants. At worst, they are excessive, undisclosed, and illegal.”
St. Louis attorney Jerome Schlichter, who filed the suit against Lockheed on behalf of the company's employees, told the Washington Post “This whole area has been off in a dark closet and shining the light of day on these practices has resulted in reductions of fees not only for companies that have been in litigation but throughout the industry."
There's more litigation in the legal system that may provide an even louder bullhorn for employers to change their ways.
Schlichter filed several 401(k) suits some six years ago, many of which are winding their way through the federal court system. One is going to be heard by the Supreme Court next year.
Why all the fuss about retirement plans?
When employers stick in funds that eat up employees' funds though high expenses, it imperils their retirements.
The "expense ratio" on the funds within your 401(k) portfolio come out of the money you've invested. The higher the fees, the lower your total savings. The math is undeniable.
Employers have gotten away with dumping high-priced "retail" or broker-sold funds into 401(k)s when they could offer bargain-basement "institutional" or cheap index funds from Fidelity, iShares, Schwab, State Street (SPDR) or Vanguard.
“This whole area has been off in a dark closet and shining the light of day on these practices has resulted in reductions of fees not only for companies that have been in litigation but throughout the industry,” Schlichter told the Post.
Ready for your one big move?
Ask your employer to offer index funds that have expense ratios that charge less than 0.50% annually.
They won't have to look far since they've been on the market for years.
One of the cheapest big stock index funds, for example, is the SPDR S&P 500 ETF (SPY), which charges you 0.09% annually for owning all 500 stocks in the S&P Industrial Index.
There are also ultra-cheap funds that own bonds, global stocks, real estate investment trusts and Treasury Inflation Protected Securities (TIPs), which guard against interest-rate risk.
Don't wait for the Supreme Court to rule or Congress to act on high 401(k) fees.
Set up a meeting with your 401(k) administrator in the coming year. Get other employees involved after checking how your 401(k) compares with others of its size on a service like Brightscope.
If you're looking for a financial New Year's resolution for the coming year, this is a good one.
