For generations, pensions were the retirement plan standard for just about every employer. A good pension was what employers used to attract the best workers. It was also a promise that if the employee devoted himself to the company, the company would take care of him and his family after his working years were over. A pension is often referred to in technical terms as a “defined benefits plan.” These plans offer guaranteed automatic payouts in retirement based on a formula that usually takes into account your salary and years of service.
The longer a person works and the more they make, the higher their automatic payouts. Social Security is a type of defined benefit plan. Pensions have become like the spotted owl – they still exist but they are hard to find. The predominant retirement benefits scheme being used by employers today is the 401(k) plan. This retirement plan is technically called a “defined contribution plan.”
This is a type of retirement plan where an employee, employer, or both contribute money to an employee’s retirement plan. These plans have more risk than a traditional pension since they are dependent on the returns of the investments in the stock market. In 1978, conventional pensions accounted for nearly 70 percent of all U.S. retirement plans. By 2013, conventional pensions accounted for only 35 percent of retirement plans. Now that most employees have defined contribution plans, such as 401(k)s, that require them to make major investment decisions, the question is, who bears the responsibility for making those important financial decisions? If investments are made in the wrong stocks, bonds or funds, there may not be enough money to get a person through retirement.
Workers have long been saddled with 401(k) plan options that limit investment choices and provide no way to negotiate for better plans or lower fees that are charged for keeping the plan updated. In contrast, employers are the ones who set up the plans and/or hire the investment managers.
Traditionally, many courts have refused to hold employers accountable for bad investment decisions. That’s because technically workers chose which funds to invest their savings in, within the narrowly tailored 401(k) plan. However, the U.S. Supreme Court recently issued an important ruling that was a rare victory for workers. In Tibble v. Edison International, a unanimous court held that employers can’t just set these retirement plans up and then close their eyes. The ruling effectively shifts the burden in disputes over monitoring retirement plans from workers to the employers that administer them. This is important for a number of reasons.
Management fees associated with 401(k) plans typically are buried deep in legal documents and can go unnoticed by most workers. As a percentage, these fees appear small — 1 percent or 2 percent of total assets — but they can do major damage to an investment portfolio over time. For example, over two decades, a 1 percent fee on a $100,000 portfolio would cost a retirement fund $30,000 more than a fee of 0.25 percent, assuming an annual 4 percent rate of return. Put another way, an employee with the lower-fee plan would have $30,000 more for retirement. The larger the nest egg the worker saved, the more they would benefit from the better rate.
Hopefully, this ruling will get the attention of Corporate America and cause employers to work harder at protecting workers hard earned savings. If you need more information on this subject, contact Roman Shaul at 800-898-2034 or by email at Roman.Shaul@beasleyallen.com.
Source: LA Times, “Employers must monitor 401(k) fees.”
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