Employees May Have Legal Claims For Sharp Declines In 401(k) Accounts
401(k) Plans – the primary retirement savings vehicles for most Americans – have lost more than $500 billion over the past 12 months as a result of the market crisis, as reported by Eleanor Laise of the Wall Street Journal on October 11, 2008 in an article entitled “Statement Shock Hits 401(k)s.” The average 401(k) balance had dropped roughly 18% to 23% as of October 30, 2008, depending on the participant’s age and tenure with the plan, according to another Journal article by Ms. Laise entitled “Financial Crisis Highlights Shortcomings of 401(k) Plans” published on November 3, 2008. There are $4.5 trillion in defined contribution plans, including $3 trillion in 401(k) plans. The situation is especially dire for workers who recently retired or are on the brink of retirement.
Employees who have lost money and were unsuitably invested should understand that they may have legal remedies. In a recent landmark decision, the United States Supreme Court held that 401(k) plan participants can now bring claims against their employers and other plan fiduciaries. Employers and other retirement plan fiduciaries may be liable for any unsuitable investment recommendations or choices offered to plan participants who have suffered losses. A 401(k) plan participant who has suffered a loss can and should have his or her account evaluated at no charge by counsel experienced in such matters.
Ms. Laise’s articles highlight a number of problems with 401(k)s. First and foremost, many employees appear to have an investment mix that is far too aggressive and volatile for their age and financial circumstances. 27% of 401(k) participants age 56 to 65 had 90% or more of their 401(k) account in stocks or stock mutual funds, according to the Employee Benefits Research Institute. That is a truly astounding statistic, especially when one considers the “age-in-bonds” rule of thumb espoused by some advisors – i.e., the percentage of bonds in your portfolio should equal your age.
To make matters worse, some employers encourage their workers to select company stock in their 401(k) accounts, thereby further concentrating and increasing the risk of loss. Having too much company stock in a 401(k) account violates a basic truth about investing – never put all (or most) of your eggs in one basket.
Employees are also being lured into investments that sound conservative but are actually risky. For example, there is a high degree of variability among so-called Target Retirement Funds. Some of such funds that are described as being conservative actually hold unstable securities that are subject to sharp declines. Such problems are often compounded by excessive fees that are inadequately disclosed.
The articles further point out that opinion is turning against defined contribution plans because the risk is just too great that you might be in the middle of a market meltdown when you retire. Retirement security should not depend on having the good luck to retire when the market is going up or is at least stable, say detractors.
