Some Employees Sue For Better Deals On 401(k) Options

Sep 15, 2016
Originally published on September 15, 2016 6:35 pm
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KELLY MCEVERS, HOST:

There have been a lot of lawsuits recently where workers sue their employers because they say they're paying too much for their 401(k) plans. Universities, oil companies and grocery chains have been sued often over high management fees. Noel King from our Planet Money podcast reports even employees of mutual funds are suing.

NOEL KING, BYLINE: Let's say you're working for that university or the grocery store. Usually your 401(k) gives you a menu of funds to invest in. You look at which ones have good returns. You pick a handful. You hope for the best. The key is there's a menu. You have choices.

Often these days advisers will tell you to invest in an index fund with low fees, but if you work for a mutual fund company that specializes in selling more expensive funds, things can get a little weird. Mutual funds are baskets of stocks often picked by people who call themselves experts.

Carl Engstrom is a lawyer with a firm called Nichols Kaster. He represents former employees of American Century, a company that manages mutual funds. Engstrom's plaintiffs say the only options on their core 401(k) menu were American-Century-managed funds. He compares this to going into a diner for breakfast.

CARL ENGSTROM: I would say it's like going to a Jimmy Dean diner and seeing nothing but sausage on the menu. In other words, oh, I think there's a reason that there's nothing but sausage on this menu, and it has to do with what Jimmy Dean themselves manufacture.

KINGS: Sausages - the legal term for this is employer self-dealing. Engstrom says it's not necessarily that the plaintiffs think American Century managed their money badly. It's just that there are other, cheaper funds, and the workers aren't given those as options.

The suit alleges the American Century plan's fees are 30 to 40 percent higher than fees of similarly sized plans. And because the workers are investing in American Century funds, most of those fees go back to American Century.

ENGSTROM: It's like an orphanage that also has a gruel business on the side. So not only are they earning money off of the orphans within the orphanage, but they're also making money off of the gruel that gets served.

KINGS: While the company makes money. The employees may see less of a return. There's a lot of debate over the best way to invest for retirement, but lower fees leave you with more money. Wade Pfau is a professor of retirement income at the American College of Financial Services. He says over time, fees really add up.

WADE PFAU: There's a story, and I'm not sure if it's true or not. But I've heard that Albert Einstein said that compounding interest was the eighth wonder of the world. But that concept also applies to the fees because these are compounding fees. The compounding fees really cuts into your ability to accumulate wealth.

KINGS: And he says companies have a responsibility to get their workers set up for retirement as well as they can.

PFAU: And that may require indicating (laughter) or coming to the realization that their own funds may not really be the best options for their employees.

KINGS: So what does American Century say about all of this? The company sent us a statement. A spokesman said, quote, "the suit by former employees is without merit, and we intend to mount a vigorous defense." Carl Engstrom says his law firm has seven lawsuits pending that involve financial services companies and allegations of employer self-dealing. Noel King, NPR News TEST Transcript provided by NPR, Copyright NPR.