Employees who have encountered high 401(k) fees have fought back with lawsuits, and the courts have begun to side with them. One of those involved in this litigation is Grant Easterbrook of Dream Forward Financial. Easterbrook discusses the litigation in this report.
Easterbrook is involved in two lawsuits at the moment. The more important of the two is Tibble v. Edison International, which was argued before the Supreme Court in February, 2015. The decision should be handed down by the end of June. Regardless of the outcome, Easterbrook says, the case will “cause awareness of legal liability to skyrocket.” It’s important for employees to be aware of their choices and for employers to select a plan with low costs and with the best interests of employees in mind.
Employees are not always aware of the fees associated with their 401(k) plans, but the fees can add up. Fees include things like maintenance fees and commissions. But there are also hidden opportunity costs, as Easterbrook characterizes them, and all of them together can have a serious negative impact on an employee’s retirement fund. Employees are forced to use a proprietary fund from which the administrator gets a cut. The amounts involved over a period of ten to thirty years can be huge.
Some employees who change jobs will choose to leave their funds in the 401(k) provided by the employer they have left. This may not be a good idea. Easterbrook says if he were looking at an employee’s situation to provide advice, an important consideration would be the amount of employer match. In a high-fee fund, the employer’s match may effectively offset the high cost of the plan. However, if the employee leaves and loses that match, the fund should be rolled over.
According the rules affecting these plans, an employer should be acting in the best interests of the employees and not, for example, just giving the funds to his brother to administer. The point of the lawsuits that have been filed, Easterbrook says, is that some employers have not been doing what they should do but have instead put their employees’ money in high-fee funds. Easterbrook does not have, as he says, “a crystal ball” to predict what the Supreme Court with do in the Tibble case. However, any outcome will probably make employers more aware of the need to examine low cost, high quality funds for their employees.
Transparency is a problem, as fund administrators probably don’t want to share bad news with employees. Easterbrook recommends that employees should look closely at the fund choices in the plan. Employees should be looking for low cost options. It is also helpful to ask someone in a company’s human resources department what kinds of fees are being charged—maintenance fees, commissions, hidden fees associated with frequent trading, and the like. Easterbrook recommends that employees not take out loans against their plans or making early withdrawals. One reason that retirement doesn’t work as well as it might is leakage from funds.
Easterbrook suggests that an employee who leaves a company should roll the 401(k) into something else, such as a self-directed IRA. The average employee will have perhaps eleven jobs during the work years. It’s best to consolidate all retirement funds into one account.
Grant Easterbrook is a co-founder of Dream Forward Financial, New York, NY. Dream Forward offers a low-cost 401(k) plan with a modern website, total transparency, top investment choices, no hidden fees, and no conflicts of interest. The company also gives employees guidance on all goals, not just retirement. Before working with Dream Forward, Easterbrook was an analyst for Corporate Insight in NYC.