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Five Things Bad 401(k)s Have In Common

Sometimes you can pinpoint what’s wrong with your 401(k). The returns may be awful or you just don’t have enough education to make the right choice of funds.

But in most cases, you will never see how your retirement funds are being damaged. Much of what middlemen do goes on behind the scenes and you may never know that you’re being fleeced.

What most abusive 401(k)s have in common is that they hide middlemen fees and their corrosive impact on your retirement savings. They often bury myriad expenses that are deducted directly from your contributions.

Under pressure from a Department of Labor Rule that goes into effect next year, many, if not most, retirement plans will be forced to clear out the carnivores that eat into your kitty. But in the interim, you have to ask some serious questions.

I’ve just pored through summaries of lawsuits lodged against employers for bad 401(k) practices. Dozens of these suits have been filed in recent years by private attorneys and employees and are working their way through the federal court system.


Here’s what I found in perusing some 139 pages of these suits by the Groom Law Group.

– Revenue Sharing. This is a legal practice where fund managers pay to play to get into a 401(k) plan. The costs are passed along to employees, who never know what hit them.

-- Breach of Fiduciary Duties. This is a legal catch-all phrase meaning that the employer wasn’t protecting you. Their vendors may have been charging excessive fees or paying for services that didn’t help employee save more money.

– Failure to offer less-expensive options. Under federal law, any company providing a retirement plan must create a prudent plan in your best interests. Since there’s fierce competition in the mutual fund world on fees — they just keep getting lower — there’s no reason for you to pay more than 1% for any mutual fund.

You can find great funds that cover most world markets for half of that. And any offerings with “12b-1,” “wrap” or sales charges are completely unnecessary.

– Putting company stock in 401(k)s. While this is becoming an increasingly rare practice, it’s still dangerous. You’re concentrating your risk in one company, one that happens to also employ you.

Remember the Enron and Worldcom debacles? Those employees were creamed by holding stock in their 401(k)s. It’s generally a bad idea.

– Failure to avoid conflicts of interest. Sometimes the same company managing funds will also offer bookkeeping services. While that’s not always a bad idea, it is if they keep their fees high.

Some of the biggest culprits are financial services companies that offer their overpriced “in house funds.” That’s double dipping.

How do you avoid these problems? Normally I would say ask for full disclosure on middlemen costs. If you know what to look for — and know if you’re getting fleeced relative to similar, lower-priced plans — then give it a whack.

But most employees don’t know anything about hidden costs. The best strategy is to ask for a yearly independent audit of your plan by a fiduciary. That way they can spot abuses and find lower-cost vendors.

The end result is usually being able to save more for retirement. This one action can transform a bad 401(k) into a good one.