For decades, high fees have quietly but steadily eaten away at the value of 401(k) retirement plans. Now employees are making headway in legal battles to force employers to lower costs.
Employees of Edison International won a big victory this month when a federal judge ruled that the company's 401(k) fees were excessive, and said employees were entitled to recover an as-yet-undetermined amount of overcharges.
U.S. District Court Judge Stephen Wilson said in an 82-page decision that Rosemead-based Edison did "substantial" harm by failing to negotiate lower prices with the outside firm running the 401(k). A large company such as Edison easily could have gotten a better deal on three of the mutual funds in its plan, but simply didn't try, the judge said.
The Edison case is one of more than two dozen lawsuits filed against U.S. employers in recent years. The suits allege that companies allowed 401(k) providers to stuff the plans with high-cost investments in exchange for reducing the administrative costs paid by the employers themselves.
The most prominent case accuses Wal-Mart Stores Inc., which is famous for squeezing suppliers for lower prices, with failing to negotiate the lowest fees for its 401(k) participants. The plaintiffs got a boost late last year when an appellate court ruled that the closely watched case could proceed.
The Edison ruling could influence the outcome of other suits and turn up the pressure on employers to pay closer attention to 401(k) fees, experts say.
"It's a big development," said Fred Reish, a partner at Reish & Reicher in Los Angeles who is not involved in the case. "It will encourage plaintiffs attorneys to continue to litigate and will encourage [employers] to look for lower-cost share classes for their plans, which will ultimately benefit the participants."
Retired Edison employee Fred Suhadolc, a lead plaintiff on the suit, said he and other employees were dismayed at the high fees in their plan because they thought the company would do its best to keep them low. Unfamiliar with the stock market and 401(k)s, Suhadolc said he never understood the fees and still has no idea how much he overpaid.
"It's frustrating and disappointing that you expect to be treated honestly and fairly, and when you find out that you're not you almost feel cheated," said Suhadolc, a former maintenance mechanic at an Edison subsidiary in Illinois.
Edison declined to comment.
It's difficult to determine the financial toll of excessive 401(k) fees, but some experts say they collectively drain tens of millions of dollars a year from unsuspecting investors.
At Edison, for example, an average employee who invested exclusively in the three funds would have paid more than $300 a year in unnecessary fees, estimated Jerome Schlichter, the St. Louis attorney who represented Edison employees. That does not include foregone investment gains on that money.
Over a worker's career, an extra 1% a year in fees could reduce the eventual value of a 401(k) account by 28%, according to the Labor Department, which on July 15 released a rule to enhance disclosure of 401(k)s and other retirement plans to help determine the "reasonableness of compensation paid to plan service providers."
The lawsuits underscore the crucial role of 401(k) and other retirement plans at a time when Americans are grappling with the financial trauma of the recession. With traditional pensions disappearing and concerns growing over the long-term health of Social Security, Americans are relying more than ever on 401(k)s to fund their golden years. But a study released this monthby a nonprofit group found that even many wealthy Americans are in danger of running out of cash in retirement.
Steep losses in the stock market in recent years have turned the spotlight on retirement-plan costs. The Labor Department unveiled planned new rules this month that would force mutual funds and other 401(k) service providers to be more forthcoming about their charges. The idea is to give employers better information with which to negotiate 401(k) fees.
But the pressure on companies to limit fees for their employees is colliding with their desire to limit their own 401(k) costs during a troubled economy. For example, almost half the companies that reduced or eliminated 401(k) matching contributions during the financial crisis have not restored them, according to a study last month by Towers Watson.
Companies "certainly are paying much more attention, but that is not always translating into lowering participant expenses," said Bud Green, chief investment officer at 401(k) consulting firm at MJM401k in Santa Monica.