How bad are 401(k) fees?

Eat up your tax benefit bad! A study by The Yale Law Journal estimated “that fees are so high in 16% of analyzed plans that they consume the tax benefits of investing in a 401(k) for a young employee.” More on that study below, but first more on how bad 401(k) fees are.

So bad a 401(k) vendor was sued for excessive fees – BY THEIR OWN EMPLOYEES INVESTED IN THEIR OWN PRODUCTS! That’s right, InvestmentNews reports that MassMutual, the well known small business 401(k) provider, was sued by its own employees for offering plans that had excessive fees. According to InvestmentNews, the suit alleged that MassMutual “breached their fiduciary duty under the Employee Retirement Income Security Act of 1974 by causing unreasonable administrative fees to be charged to the plans, offering high-cost and poor-performing investments, and offering a fixed-income option that was “unduly” risky and expensive.” Massachusetts Mutual settled for $31 million.

Oh, wait, the fees are SO bad that other well-known providers were sued, like Fidelity (settled for $12 million), American CenturyTransamerica (settled for $3.8 million), and Morgan Stanley. While there are many mistakes that can make your plan a litigation target, excessive 401(k) fees have been a primary culprit of late.

Now, let’s talk about the Yale study on excessive 401(k) fees

The Yale study on 401(k) fees, titled “Beyond Diversification: The Pervasive Problem of Excessive Fees and ‘Dominated Plans’ in 401(k) Plans,” found “that the primary problem for investors in 401(k) plans is not loss due to lack of diversification, but loss due to excessive fees.”

It continued: “Overall, we find that investors in an average plan suffer a cost that is seventy-eight basis points higher than the costs associated with retail index funds.

We also estimate that fees are so high in 16% of analyzed plans that they consume the tax benefits of investing in a 401(k) for a young employee. Importantly, the observed costs do not appear to be due to economies of scale; we find substantial variation in total costs over plans of similar size.”

In other words, the fees are too high! And the fees are so high some folks early in their careers might lose all of the tax benefits as a result of these excessive fees.

Yale University sued for excessive 401(k) fees

After doing such great research on excessive retirement plan expenses, you’d expect a place like Yale to be hyper-aware of the dangers associated with high cost defined benefit plans.

But you’d be wrong.

Unfortunately, even universities like Yale are getting into trouble, and being sued, for sponsoring high fee plans. Yale (and MIT and NYU) were sued in August – learn more in InvestmentNews. These universities actually offer 403(b)’s, which are similar to a 401(k) but for non-profits. The lawsuits represent something pretty new; while 401(k) providers have been getting targeted in excessive fee suits for a while, these are some of the first legal actions against 403(b) sponsors.