"Missed" Deeds and 401(k) Fees

The Nov. 7 issue of The New York Times included a story about “Finding, and Battling, Hidden Costs of 401(k) Plans.” The story focused primarily on the plight of Ronald Tussey, the named plaintiff in Tussey v. ABB, Inc., one of the so-called “excess fee” revenue sharing cases.

Tussey, now 70, claims that he was told that his retirement plan was “free,” even though, according to the Times article, “middlemen¹ were deducting expenses from his savings.” The story also notes that Tussey “never thought that his retirement plan might be flawed,” and that “he trusted his company so much he kept his money in his 401(k) long after he left.”

Over the years, I have been astounded at the allegations of fiduciary misconduct in these revenue-sharing cases. Each has its own flavor, of course, but for the most part they have struck me not so much as the outcomes of bad acts, per se, but rather steps that should have been taken in keeping with their fiduciary duty to ensure that the fees and services provided are reasonable and in the best interests of participants and their beneficiaries.

In Tussey’s case, ABB (his former employer) is alleged to have been told by a consultant that they were paying too much for record keeping fees, and then did nothing about it — for instance, though their decision to close a balanced fund and force participants into age-appropriate target-date funds. The use of float was also challenged. Both of those charges were dismissed by the 8th U.S. Circuit Court of Appeals; just this week the U.S. Supreme Court declined to hear the case.

But the point of the Times article was all about fees,² outlining places and ways that readers can find out about the “…raft of obscure fees and services that few employees will be able to discern,” while also cautioning that none of those resources can help them figure out how much is too much. (That did not, however, keep the author of the article from redefining ERISA’s prudent man standard of care to mean “…finding a reasonable selection of low-cost funds and services.”)

A couple of weeks back, my wife and I met with our financial advisor to transfer and consolidate some small IRAs. Having attended to the basics, the conversation turned to investments, and then to a couple of fund recommendations. The advisor carefully outlined the expense ratios associated with the fund (which seemed reasonable to me), and then turned to the charges associated with investing in that fund. He didn’t call them a load, of course,  but that’s what it was, and a hefty one at that. And, Ronald Tussey’s status notwithstanding, I was reminded again just how lucky most 401(k) participants are.

Even if, as the article frets, participants aren’t able to find or understand thier 401(k) fees and don’t know what is reasonable — even if they assume such things are free — their retirement savings are under the care and oversight of a plan fiduciary. That fiduciary is personally responsible for ensuring that the fees and services are reasonable, is expected to engage the services of experts, if necessary, to make that determination, and is accountable not only for the things that are done wrong — the misdeeds — but for the “missed” deeds as well.

Nevin E. Adams, JD

1. “Middlemen” in this case seem to have been Fidelity Management Trust Company, the plan’s trustee and record keeper, as well as Fidelity Management and Research Company, the investment advisor to the Fidelity mutual funds on the plan.

2. Lending numerical support to their claims, the Times article cites a 2012 report on 401(k) fees by the left-leaning Demos advocacy group claiming that “nearly a third” of the investment returns of a medium-income two-earner family was being taken by fees, according to its model. That model, it should be noted, assumed that each fund had trading costs equal to the explicit expense ratio of the fund. The report was authored by Robert Hiltonsmith, who some may recall being featured in the 2013 PBS Frontline special, “The Retirement Gamble.”