Will 401(k) Fee Disclosures Bring Clarity to Perplexed Workers?

Ameriprise employees sue employer over poor 401(k) performance and high fees.

Oct. 14, 2011 — -- Is your 401(k) account loaded with high, hidden fees? New federal 401(k) plan disclosure rules will soon be implemented to highlight how much fees are eating into employer-sponsored retirement accounts.

But more workers are already going after companies that they allege are taking advantage of those retirement accounts. Ameriprise Financial Inc. employees participating in the company's 401(k) plan filed a suit last month against the company, alleging the financial services firm invested employee retirement money into its own untested funds and charged expensive, uncapped fees.

Several employees filed a suit in a Minnesota district court on Sept. 28, seeking class-action status for all employees participating in Ameriprise's 401(k) plan, established in October 2005. The basis of the suit is the Employee Retirement Income Security Act of 1974 (ERISA), which directs employers to exercise fiduciary duties "solely in the interest of the participants and beneficiaries...defraying reasonable expenses of administering the plan."

Jerome Schlichter, attorney for the Ameriprise employees, said they are accusing Ameriprise of self-dealing and breach of fidiciary duties.

"As a direct result of these prohibited transaction violations, the plan, directly or indirectly, paid millions of dollars in investment management and other fees that were prohibited by ERISA and suffered millions of dollars in losses," the suit states.

Schlicter said the suit potentially applies to tens of thousands of employees if it is granted class-action status.

Ameriprise did not return a request for comment.

Schlicter said Ameriprise chose its own "poor performing funds," which fund rating company Morningstar gave one or two stars out of five at one point.

"Ameriprise put profits in its own mutual funds first before employees," he said. "Some funds did not even have an operating history before they were picked by Ameriprise for their 401(k) plan. No competent investment manager would select an investment that had no operating history yet that's what Ameriprise did of its own funds that it set up for employees. We say that's improper."

While many 401(k) plans charge employees flat administrative fees, such as $25 per participant per year, Schlicter said Ameriprise employees were charged an uncapped record-keeping fee that increased relative to asset value.

Schlichter also represented employees in similar suits filed in 2006 against construction company Bechtel, machinery company Caterpillar and contractor General Dynamics. Caterpillar and General Dynamics settled last year while Bechtel settled this year.

Michelle Michael, Bechtel's corporate communications, told ABC News in an emailed statement: "While we maintain we complied with the Employee Retirement Income Security Act of 1974 (ERISA), we believe the settlement of the long-standing litigation was a desirable outcome for everyone involved."

Caterpillar and General Dynamics Corp. did not return a request for comment.

Some of the hidden fees will come to light starting next summer, when the Labor Department's Employee Benefits Security Administration's rule approved last October are implemented. That rule requires 401(k) providers to disclose fees and expenses to improve transparency to workers.

The final rule will become applicable to covered individual account plans for plan years beginning Nov. 1. For calendar year plans, compliance will be required on Jan. 1. Workers should begin to see greater fee disclosure this summer.

Mike Alfred, co-founder and CEO of financial information company BrightScope, said the several suits against employers related to 401(k) plans pushed that regulation forward but compliance and more-detailed disclosure will be up to the providers, such as Fidelity, Vanguard and Charles Schwab.

Experts offered tips to ABC News on how to ask the right questions to your employers and plan providers regarding how much value you really receive from your 401(k) plan.

Ted Schwartz, president and chief investment officer of Capstone Investment Financial Group and personal finance, said he is a "strong proponent" of full disclosure of fees and transparency in 401(k)s.

"However, at the end of the day it remains a question of what you get for the fee paid rather than just how much the fee is," Schwartz said. "If you receive a fund that does a good job of managing risk in a difficult environment, that is certainly worth a higher fee than a fund that merely provides a return that is highly correlated to an index and offers no protections against a steep decline in that index."

Russel Kinnel, Morningstar's director of mutual fund research, said employees should determine their plan's expense ratio and fee level. Fund participants can view Morningstar's ratings for a fund and its performance history on Morningstar.com if the fund is public and has a ticker symbol. The site provides an expense ratio and fee level for the fund relative to its peer group. The fee level ranges among: low, below average, average, above average, and high. The funds also have a star rating, which Kinnel says are not opinions or analysis but rather just a quantitative measure of past adjusted risk and returns.

"Among mistakes people make are reading into single-year performance," Kinnel said. "It's easy to pull up 401(k) performance on a website, rank by 1-year returns and put all your money in the top 5. The problem with that is markets are very cyclical so it's not uncommon for last year's winners to be this year's losers."

Kinnel said employees can ask employers if they offer target date funds, which are growing in popularity. Those funds adjusts your asset mix over time, so less risky assets, such as bonds, comprise most of the fund closer to your target retirement date.

Alfred said target-date funds are a "standard offer" and were originally created for 401(k) funds. Though Alfred said it is best to have a diverse portfolio instead of worrying about individual funds.

People can got to BrightScope's website to check if their employer's 401(k) plan has a BrightScope rating. The rating takes into account company contributions, fees, investment menu quality, vesting schedules, eligibility periods and other criteria, from data filed Dec. 31, 2009.

Alfred said the imminent 401(k) regulation is a good step forward in transparency, but the disclosures are still lacking because they do not require providers to provide context and comparison for fees.

"There will be varying degrees of compliance with any regulation," he said. "It will be interesting to watch next year."