What Fidelity Employees' 401(k) Fight Means For Your Retirement

Fidelity Investments Greenville SC USA
401(k) plans are a retirement investing staple. But they've drawn criticism from many corners, from an Economic Policy Institute study that showed how 401(k)s have raised the level of inequality among retirees to a Los Angeles Times article discussing how small-company employees pay much higher fees than their large-company counterparts.

Amid the controversy, though, one new battle stands out.

More than two dozen employees at retirement-plan provider Fidelity Investments have joined a proposed class-action lawsuit filed earlier this year against their employer over its own 401(k) plan, arguing that it doesn't meet the company's fiduciary duty to give employees the best options available.

When 150 Funds Aren't Enough

The lawsuit strikes at the heart of what employers have to provide in their 401(k) plans. At first glance, Fidelity's 401(k) plan seems to be relatively generous, with a dollar-for-dollar match of up to 7 percent of employees' salaries. Moreover, the plan includes more than 150 different fund options covering just about every type of investment available to investors generally.

But the employees in the lawsuit argue that every single one of those 150 funds is managed by Fidelity, and many of them carry higher fees than comparable funds from outside providers. In particular, the plaintiffs pointed to new Fidelity funds without established track records as well as poor-performing funds as being inappropriate choices. It also suggested that using an institutional asset manager could have produced cost savings of 72 percent compared to certain target-date funds made available to employees.

Plaintiffs' attorney Gregory Porter described the Fidelity plan as "being run like a small company plan. Instead of investing in low-cost institutional funds, the plan's fiduciaries have put the plan in dozens of expensive mutual funds." Yet a Fidelity spokesman described the suit to Investment News as being "totally without merit."

What 'Fiduciary Duty' Means

Both sides have arguments that are easy to understand. Employees point to Fidelity's exclusive use of its proprietary funds. Fidelity, meanwhile, is in the business of providing 401(k) services and therefore can make the case that it's a logical choice to provide them for its own workers. Further, its funds have relatively modest fees compared to some of its fund-company competitors.

The specifics of the Fidelity lawsuit arguably apply only to employees at financial institutions that themselves participate in the 401(k) business. But for millions of Americans who work outside the 401(k) industry, the question is deeper: How much flexibility do companies have in balancing 401(k) features with costs to produce solid plan offerings?

Employers can sometimes cut their own administrative costs by choosing plan providers that charge them less, and instead charge higher expenses directly to employee 401(k) accounts. Without that option, some employers might simply choose not to offer 401(k) plans at all, taking away a valuable tool for employees to save for their retirement.

Making Your Own Smart Choices

One fact from the Fidelity lawsuit that's striking, however, is that 84 percent of the assets invested in the company's plan by its employees were invested in actively managed Fidelity funds.

The reason that's important is that even though the vast majority of the funds that Fidelity made available to employees were actively managed, they still had access to some lower-cost index-fund choices. In other words, even though employees could have put 100 percent of their money into those low-cost choices, they didn't. They made their own affirmative decisions to pay more for Fidelity's active management.

As you consider your own 401(k) plan investment options, keep in mind that no matter how good or bad your overall plan might be, there might be at least one or two solid investment options that you can select, enabling you to avoid the inferior choices. By focusing on minimizing costs, you can make sure more of your hard-earned returns end up remaining in your retirement account.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

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November 30 2013 at 2:42 PM Report abuse rate up rate down Reply

"Those stock market guys are crooked." Al Capone

September 25 2013 at 7:17 PM Report abuse rate up rate down Reply

id like to sue fidelity . fiduciary duty my blank

September 25 2013 at 7:05 PM Report abuse rate up rate down Reply

I don't understand this since my 401k plan uses Fidelity. We have an option that allows us to invest in anything we want through the Fidelity brokerage. We can buy mutual funds from any provider so I don't know why Fidelity employees do not also have this.

September 25 2013 at 5:41 PM Report abuse rate up rate down Reply

Why do so many people like to use the term \"generous\" when they describe the benefits given these days? Generous would be a company paid pension or company paid healthcare after retirement plan. Since we\'ve been ripped off of these things in face of double-digit profits with meager if any raises, a decent 401K match should be the very least they give you.

A 7% match is good but but why not a 10 or 15% match? So often they give you a lousy 3% match at best and speak of it as a favor. It\'s just shameful. Eventually they\'ll shift most healthcare costs on us too.

How many people actual retire with a million or more in their 401K accounts? Even if you match out the contribution you make, it still likely isn\'t enough to get there. I\'ve known several people whose accounts just get wiped out during a bad year just when they are about to retire and it\'s all on you to make the right investments to generate enough income. How do I know what fees they are charging me? So much is then taxed away once you withdraw it! We should have to pay tax on the amounts under a million dollars!

September 25 2013 at 5:14 PM Report abuse +1 rate up rate down Reply
1 reply to boston1936's comment

I meant to say, we should not have to pay tax on amounts withdrawn under a million dollars. Too much of the money we earn in these accounts is taxed away. That\'s a good reason why it typically ends up not being enough to retire.

September 25 2013 at 5:16 PM Report abuse rate up rate down Reply

Fidelity's funds all claim to have good to great historical rates of return. Funny, in 25 years I have never made a penny on a Meril Lynch or Fidelity managed fund. In fact, with Fidelity, I have actually lost 6 figures due to their lack of fiduciary oversight. This is a pyramid scheme and only Fidelity's fund managers are getting rich.

September 25 2013 at 9:58 AM Report abuse rate up rate down Reply

Nice big run-up in the stock market - if your 401K isn't showing a decent return, chances are is being picked off by the many layers of parasites that live off of YOUR investments.

September 25 2013 at 9:35 AM Report abuse +3 rate up rate down Reply

So this is a case of employees not managing their own funds and letting the company make the choice for them. Why do people feel they can act irresponsibly and then sue because they never touched or managed their own lifestyle. That's just ludicrous.

September 25 2013 at 8:28 AM Report abuse +2 rate up rate down Reply

I love Fidelity. I invest in all stock funds and am up %22 this year, I have no complaints.

September 25 2013 at 7:56 AM Report abuse +2 rate up rate down Reply

Our company has several plans through JP MORGAN. Many of us contributed to the company\'s own stock program. It had dropped from over $100 a share down to $36. One day we received letters from JP Morgan telling us that \"funds had been moved\". I called their number to be told that the company was doing away with the stock fund! He couldn\'t give me a reason. And I told this \"twirp\", I\'ve been putting money in this thing every pay-period for the day the stock would go up. He said, \"maybe the company\'s trying to lookout for their employees\"? I said, \"I don\'t think so? I had 1 week to move the rest of my cash from the stock fund. As you probably know, \"the stock soared after \"the little people\" were forced out, after selling our \"now lower than whale---t shares back to the company. JP MORGAN AND WALL STREET ARE A BUNCH OF CROOKS. tHE COMPANY STOCK WASN\'T DELISTED FROM THE NYSE. WHAT A CORRUPT COUNTRY THE USA IS! OUR MONEY WAS STOLEN.

September 25 2013 at 5:17 AM Report abuse +1 rate up rate down Reply