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Companies retool 401(k) plans after backlash

Russ Wiles
The Republic

Offer a crummy 401(k) plan; pay the price.

That's the message more companies are getting as their workplace retirement programs come under greater scrutiny by employees, consultants and class-action attorneys.

In the latest legal headline, International Paper this month agreed to pay a $30-million settlement over high fees, poor investment choices and other shortcomings in its 401(k) plan. Cigna/Prudential and ABB Inc./Fidelity are some other employers or plan providers that have agreed recently to multimillion-dollar settlements or got hit with multimillion-dollar judgments.

These legal defeats are "wake-up calls" for employers and investment professionals "to watch what they're doing," said Alan Norris of Norris Wealth Management, a Phoenix firm that works with companies offering 401(k) programs. Employers and their investment professionals should be asking whether they're "making decisions in the best interests of a plan's participants and beneficiaires," he said.

But workers also should pay more attention, especially as 401(k) programs have displaced traditional pensions as the main type of retirement vehicles offered through the workplace. Fees and investment options in the 401(k) field have come under greater scrutiny, with federal regulators last year requiring employers to provide more detailed information.

The combination of legal threats and increased transparency have helped somewhat. Fees charged to workers in 401(k)-type programs in 2013 have fallen to their lowest levels in the eight years that NEPC, a Boston-based investment-consultant firm, has conducted this study.

The cost decline "has been fueled by new rules aimed at making fees more transparent and well-publicized litigation," wrote NEPC's Ross Bremen and Dan Beaton in the September report.

The median total cost of 401(k)-style plans eased to 0.53 percent in 2013, equivalent to a yearly charge of $5.30 for every $1,000 invested. That's down from 0.55 percent in 2012 and 0.59 percent in 2010. NEPC's total-cost measure includes mutual-fund fees, recordkeeping expenses and other administrative charges paid by companies and, especially, their workers.

The NEPC tracked fee data at 95 programs encompassing roughly one million participants, meaning the study looked mainly at big 401(k) plans that offer the best economies of scale. Programs available from smaller employers typically aren't such good deals for their workers, with higher participant-borne costs and sometimes an inferior selection of investments.

The report also pinpointed other favorable developments. These include a slight increase in the percentage of employees participating in 401(k) plans, a slight decrease in the use of a company's own stock as an investment option (a poor diversification choice) and a modest rise plans enrolling workers automatically, unless they opt out.

But fees are where the focus is. Managers at smaller companies often aren't well-versed in fiduciary requirements and have a harder time determining what are reasonable retirement costs and services, said Norris. And workers are largely apathetic, even though the money accumulating in 401(k) plans will wind up being the single biggest asset for many people. "Sadly, most people aren't paying more attention — maybe 10 percent are," he Norris.

Joseph Doku, chief operating officer at Plan Sponsor Services in Phoenix, encourages workers to ask their human-relations representatives or other company officers for evidence that the fees they pay are competitive with firms of a similar size or in the same industry.

Employees also should try to evaluate fees in the context of the services provided. Slightly higher costs could be justified if a firm provide seminars, in-person meetings, newsletters or other help.

"I thought things would have changed more quickly," Doku said, referring to the lack of employee reaction to the disclosure requirements unveiled last year.

Even with access to more information, workers often don't know how to analyze it as it relates to what they own and what they're paying. "There's still a lot of room for improvement," Doku said.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.

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