It has long been my view that 401(k) plans are a national disgrace. They are rife with conflicts of interest between those who "advise" them and the participants who contribute to them. The investment options in the plan are chosen through a cozy, complicated and little understood process by which mutual funds make payments to brokers and insurance companies in order to get selected for a coveted place in the line-up of funds from which participants are required to make their selections. In any other context, these payments would be called bribes. In the 401(k) industry, they are known as "revenue sharing payments", justified by tortured logic intended to obscure their real purpose, which is to populate these plans with expensive, actively managed funds likely to underperform index funds of comparable risk over the long term.
The inner workings of the 401(k) system are shrouded in secrecy and mired in complexity, which is exactly the way the securities industry wants to keep it. There has been little scrutiny of how investment options are actually selected for inclusion in the plan. Justice Louis D. Brandeis famously stated that "sunlight is said to be the best of disinfectants". 401(k) plans have been operating in very dense fog.
Lawsuits challenging this unsavory process have had mixed results. Most have been dismissed as having no legal merit. Some have been quietly settled. None have gone to a trial on the merits, until now.
Tussey v. ABB, Inc ( Case No. 2:06-CV-04305-NKL) is a class action brought in the United States District Court for the Western District of Missouri, Central Division, by present and former employees of ABB, Inc, who were participants in two 401(k) plans. The plans included mutual funds managed by Fidelity Investments. Affiliates of Fidelity served as investment adviser to the mutual funds in the plan and as recordkeeper to the plans.
After a four week trial, U.S. District Judge Nanette K. Laughrey issued an extensive opinion. She found that ABB and Fidelity "... violated their fiduciary duties to the Plan when they failed to monitor recordkeeping costs, failed to negotiate rebates for the Plan from either Fidelity or other investment companies chosen to be on the PRISM platform, selected more expensive share classes for the PRISM Plan's investment platform when less expensive share classes were available, and removed the Vanguard Wellington Fund and replaced it with Fidelity's Freedom Funds."
The Court was especially critical of the process employed by the Pension Review Committee to replace the Vanguard Wellington Fund with Fidelity's Freedom Funds. The Court noted the stellar, long term track record of the Wellington Fund. It found that the "... recommendation to add the Freedom Funds to the Plan's investment platform and remove the Wellington Fund despite its excellent performance record was motivated in part by his desire to decrease the fees that ABB was paying and to maintain the appearance that the employees were not paying for the administration of the Prism Plan." So much for acting in the best interest of the plan participants.
As compensation for the misconduct of the plan fiduciaries, the Court assessed damages of $36.9 million and left open the possibility of awarding attorney fees to the plaintiffs.
I contacted ABB and was told by their representative that it "strongly disagreed" with the decision and was "considering its options, including an appeal."
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of "The Smartest Investment Book You'll Ever Read," "The Smartest 401(k) Book You'll Ever Read," "The Smartest Retirement Book You'll Ever Read" and "The Smartest Portfolio You'll Ever Own." His new book is "The Smartest Money Book You'll Ever Read." The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
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Corporations should do what they do best. People need to plan their own life.
Since the market is above 2008 levels, I understand that with your account being 0, you just can't plan your financial future and now you're looking to tap other people's money.
My experience has been my broker going short on every issue I went long. And visa versa. He retired very rich and I, not so rich!
It's a crap shoot and Wall Street has loaded all the dice.
Millions of American workers are having their retirement plans leached away by the vampire squids of Wall Street, ever since they replaced pension plans with 401K plans. Many of us older workers have been screwed so bad that suicide is becoming preferable to living in poverty. Corporate America is not only heartless, it sucks the life right out of us.
Things are the way they are by design, not by accident.
Would stock investment have grown this big without all our middle class money that's been poured into 401Ks? "Lend us your money, middle America, we'll skim a little from everyone, don't worry, it's only a little, you won't even notice. We'll put it somewhere that may increase it at the rate of inflation or maybe it will lose half its value."
I understand making money from money by charging 5% interest on money and paying the owner of the money 3.5%. I don't understand making money from wild swings in stock value of companies due to the whims and emotions of big traders doesn't make any sense at all. Stock advisors all say "Be patient, you can't time the market." But at some TIME you withdraw your money, if you have to withdraw at the wrong time you've lost a lot.
The dumping of trillions of middle class 401K dollars into mutual funds is the only thing that's propping up the inflated value of stocks. It's a much bigger Ponzi scheme than the social security system could ever hope to be.
401(k)s are not perfect, but they offer a way for individuals to save for retirement that would otherwise not be. Further they offer a match that is 'free money' if the employee fully utilizes this option and meets the minimum for the match. Nowhere else can you double your money guaranteed.
Yes, the value of the 401(k) will fluctuate (unless completely invested in cash), but so do all investments. Saving for retirement will be unsuccessful if one hopes to ignore investments and solely rely on savings accounts or CDs. Fluctuations in the market, or volatility, can be managed though portfolio diversification. This is mathematically sound and utilized by financial planners to maximize returns and minimize risk. And while day to day, or even month to month, account values will change, over a long term period assuming proper asset allocation, the account will be higher than where it started.
Even old pension plans that promised a benefit to employees would invest the retirement plan's funds in order to achieve enough growth to satisfy the obligation of the employee. There are no smoke and mirrors here. The burden of investment performance has shifted from the employer to the employee, but the mechanics are the same.
In late 2007 - Feb 2009, EVERYTHING went down, down, down. So much for your portfolio diversification idea.