Jeff Powelson knows how tough it is to fight for lower fees in a 401(k) retirement plan. He tried to get his employer to add lower-cost investment options to its plan in late 2008. He failed. But when he switched jobs last year, the 27-year-old took one look at his new, pricey 401(k) plan and decided to try again.
Sel?uk Demirel
This time, Mr. Powelson, a controller at a Washington corporate foreign-exchange firm, is winning the fight. After he lobbied for months, his employer Tempus Consulting plans to replace its plan’s higher-cost actively managed funds with cheaper index-tracking funds. “At companies our size, you don’t have someone devoted 24 hours a day to these human-resource things,” says Keinan Ashkenazi, a co-owner and principal at Tempus. Mr. Powelson “was able to take it by the horns and really look at it.”
When it comes to 401(k) plans, Mr. Powelson says, “I am rather passionate.”
So are a growing number of workers horrified by losses in their 401(k) retirement plans. They are finally getting traction where lawmakers and regulators have stumbled: putting the squeeze on high retirement-plan fees.
The tricky part: The same economic downturn prompting scrutiny of high fees also is responsible for an outbreak of job insecurity, making the issue a sensitive one to raise with employers. “I don’t want to rock the boat when they’re finding easy-enough excuses to lay people off,” says David Hostetler, 27 years old, a water resources engineer in Marietta, Ga., who hates his high fees but has opted to keep his mouth closed.
Still, many workers can no longer keep quiet, taking their grievances all the way to the courts. Workers and employers claiming their 401(k)s charged excessive fees have lately made significant legal headway. Major firms like Caterpillar Inc. and Hartford Life Inc. have recently agreed to settle such cases and to improve fee disclosure. A lawsuit against ABB Inc., a unit of Switzerland-based ABB Ltd., this year went to trial, an event all but unheard of in these cases. The judge hasn’t yet issued a decision. And late last year, an appeals court overturned a lower court’s decision to dismiss an excessive-fee case against one of the biggest 401(k)s around, Wal-Mart Stores Inc.’s roughly $11 billion plan. The case is pending before the lower court.
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Tim Hussin for The Wall Street Journal
Jeff Powelson, 27, successfully fought to lower fees in his company’s 401(k) retirement plan.
Defined-contribution plans such as 401(k)s have become the go-to retirement-savings vehicle for millions of Americans who hold $3.9 trillion in them as of Sept. 30. At many companies, they have replaced defined-benefit pension plans, which require employers to kick in cash and weather market risks. In 401(k)s, plan costs are often bundled into fund expenses and paid by workers. That practice discourages close examination of plan fees that cover investment management, plan administration and other costs. And since employers don’t have to contribute anything to the plan, they have less financial incentive to scrutinize fees. When stocks are soaring, there is little impetus to pore over the fine print.
Amid a market downturn that wiped one third of 401(k) savings off the books, fees are a new focus at kitchen tables, in courts and Congress. In the 12 months following the market’s peak in October 2007, stock holdings in 401(k)s and other defined-contribution plans lost more than $1 trillion in value, according to the Center for Retirement Research at Boston College. And over a 30-year career, an extra 0.5% annual fee can slash a nest egg’s purchasing power at the time of retirement by more than 12%, according to the research center.
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