Alamy 401(k) plans are a retirement investing staple. But they’ve drawn criticism from many corners, from an Economic Policy Institute study that showed how 401(k)s have raised the level of inequality among retirees to a Los Angeles Times article discussing how small-company employees pay much higher fees than their large-company counterparts.
Amid the controversy, though, one new battle stands out.
More than two dozen employees at retirement-plan provider Fidelity Investments have joined a proposed class-action lawsuit filed earlier this year against their employer over its own 401(k) plan, arguing that it doesn’t meet the company’s fiduciary duty to give employees the best options available.
When 150 Funds Aren’t Enough
The lawsuit strikes at the heart of what employers have to provide in their 401(k) plans. At first glance, Fidelity’s 401(k) plan seems to be relatively generous, with a dollar-for-dollar match of up to 7 percent of employees’ salaries. Moreover, the plan includes more than 150 different fund options covering just about every type of investment available to investors generally.
But the employees in the lawsuit argue that every single one of those 150 funds is managed by Fidelity, and many of them carry higher fees than comparable funds from outside providers. In particular, the plaintiffs pointed to new Fidelity funds without established track records as well as poor-performing funds as being inappropriate choices. It also suggested that using an institutional asset manager could have produced cost savings of 72 percent compared to certain target-date funds made available to employees.
Plaintiffs’ attorney Gregory Porter described the Fidelity plan as “being run like a small company plan. Instead of investing in low-cost institutional funds, the plan’s fiduciaries have put the plan in dozens of expensive mutual funds.” Yet a Fidelity spokesman described the suit to Investment News as being “totally without merit.”
What ‘Fiduciary Duty’ Means
Both sides have arguments that are easy to understand. Employees point to Fidelity’s exclusive use of its proprietary funds. Fidelity, meanwhile, is in the business of providing 401(k) services and therefore can make the case that it’s a logical choice to provide them for its own workers. Further, its funds have relatively modest fees compared to some of its fund-company competitors.
The specifics of the Fidelity lawsuit arguably apply only to employees at financial institutions that themselves participate in the 401(k) business. But for millions of Americans who work outside the 401(k) industry, the question is deeper: How much flexibility do companies have in balancing 401(k) features with costs to produce solid plan offerings?
Employers can sometimes cut their own administrative costs by choosing plan providers that charge them less, and instead charge higher expenses directly to employee 401(k) accounts. Without that option, some employers might simply choose not to offer 401(k) plans at all, taking away a valuable tool for employees to save for their retirement.
Making Your Own Smart Choices
One fact from the Fidelity lawsuit that’s striking, however, is that 84 percent of the assets invested in the company’s plan by its employees were invested in actively managed Fidelity funds.
The reason that’s important is that even though the vast majority of the funds that Fidelity made available to employees were actively managed, they still had access to some lower-cost index-fund choices. In other words, even though employees could have put 100 percent of their money into those low-cost choices, they didn’t. They made their own affirmative decisions to pay more for Fidelity’s active management.
As you consider your own 401(k) plan investment options, keep in mind that no matter how good or bad your overall plan might be, there might be at least one or two solid investment options that you can select, enabling you to avoid the inferior choices. By focusing on minimizing costs, you can make sure more of your hard-earned returns end up remaining in your retirement account.
You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.
More from Kiplinger: