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Investor lawsuits forcing companies to disclose 401(k) fees

By David Pitt
Associated Press / July 21, 2010

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DES MOINES — Workers protesting fees paid out of their 401(k) accounts want to know what the money is used for, who gets it, and proof that the charges are justified. And they’re going to court to get the answers.

Such lawsuits heat up whenever there’s a major stock market downturn, said Fred Reish, an Los Angeles attorney who specializes in employee benefits law.

“You can almost take a look at the stock market, note when the bottom has hit, and put a pencil mark on your calendar. One year later will be the beginning of the litigation,’’ he said.

The number of cases against large companies including Kraft Foods Inc. and Wal-Mart Stores Inc. has accelerated, and now midsize and smaller companies are becoming targets.

The fear of lawsuits has been enough to push companies offering 401(k) plans to improve oversight of fees and work harder to lower them.

Here are a few answers to questions about 401(k) fee lawsuits and what they mean to plan participants.

1. What drives the lawsuits? In 2001 a group of small companies with 401(k) plans sued Nationwide Insurance and its financial services business, which provided their plans. The case alleged Nationwide made deals with mutual funds offered in its plans to share some of the investment revenue. The lawsuit claimed the deal violated the federal law called ERISA — Employee Retirement Income Security Act. The law dictates how employers and plan providers must behave when overseeing worker retirement funds.

Nine years later, the case continues to drag on in the courts, but a Connecticut federal court judge’s initial ruling in favor of the plaintiffs opened the door to this new area of litigation targeting retirement fund fees and who had fiduciary responsibilities.

2. What issues seem to generate the most lawsuits? A company offering a 401(k) plan must name a person or group of people as the primary fiduciary of the plan, which will have ultimate authority for overall management. It may be someone in human resources, or could be a committee formed of company executives. The fiduciaries must carry out duties prudently as defined by the law, follow the written guidelines for the plan, diversify plan investments, and pay only reasonable expenses.

Whether the fiduciaries are appropriately handling these responsibilities is frequently at the center of litigation.

3. What does all this mean to 401(k) investors? Detailed fee reports are coming. The Department of Labor on July 15 announced a new regulation. It requires any service provider paid more than $1,000 in connection with a retirement account plan to provide detailed fee reports to investors. That includes brokerage services, record-keeping companies, and major providers and administrators of 401(k) plans.

Labor officials will give them a year to prepare for the new rules.