Last week eight major universities were sued by their own employees for failing to curb excessive fees in their retirement plans. In a series of class action lawsuits filed across the country, the plaintiffs allege that the universities failed to uphold their fiduciary duty to bargain for lower fees, eliminate underperforming investments, and reduce the often bewildering array of investment options.
Most of the retirement plans being challenged in these suits are 403(b) plans, which are similar defined contribution plans to 401(k)s, but are typically offered by colleges, universities, and nonprofit hospitals. There are primarily two issues at play: cost and the number of options.
First, cost: as we’ve mentioned frequently on this blog, defined contribution plans often contain high fees charged by Wall Street financial interests. These fees may seem small, but over decades can eat away a significant portion of a worker’s retirement assets. According to the Department of Labor:
“Paying one percentage point more in fees over a 35-year career — say 1.5 percent instead of 0.5 percent — could leave a worker with 28 percent less at retirement. An account with $25,000 — and no further contributions for those 35 years — would rise to only $163,000 instead of $227,000, at an annual rate of 7 percent.”
This is a significant amount of money that could make a real difference for working families in retirement. The lawsuits charge that the universities failed to use their bargaining power to negotiate lower fees for their employees, thereby causing their employees to lose thousands of dollars in retirement assets.
The second issue has to do with the number of investment options. Many of the retirement plans offered by these universities contained an astonishing number of investment options for employees to choose from. Having a lot of choices may sound like a good thing, but here, it’s really not. Most working people, even faculty at prestigious universities, are not investment professionals. When you are presented with over 340 investment options, it can be hard to know which one is best. Research has indicated that once workers make an investment selection, they rarely revisit that selection to see if there are better options out there. The other issue has to do with the number of poorly performing, but expensive investment options in the plans. Not only did the plans contain an overwhelming number of options, but many of those did not perform well and should have been removed from the plan.
Economist Stephen Herzenberg of the Keystone Research Center drew the connection between these lawsuits and attempts to eliminate defined benefit pensions:
“The most common argument for switching Pennsylvania’s public employees partly or completely to 401(k)-style savings is to avoid the risk of future underperforming financial markets leading to additional unfunded pensions liabilities and costs to taxpayers. But because of the inefficiency of 401(k)-style plans, the proposed switch guarantees future higher costs to avoid the risk of higher future costs. That course of action doesn’t make a lot of sense.”
401(k)-style defined contribution plans have proven repeatedly how inefficient and unreliable they are. As these lawsuits demonstrate, more and more people are realizing that 401(k)s are a failure and are beginning to fight back against the high fees that are enriching Wall Street at Main Street’s expense.