Is Wall Street Eating Your 401(k) Nest Egg? High fees are eroding the retirement savings of millions of Americans, but employers who shop around can find better options for their 401(k) plans. A small Minnesota firm offers a dramatic example.

Is Wall Street Eating Your 401(k) Nest Egg?

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Here's a fact that is sure to thrill you - we Americans, collectively, are losing billions of dollars from our retirement accounts. Researchers say this is because workers pay fees that are far too high to financial firms. Part of the trouble, these experts say, is that many companies are outgunned by financial advisers who sell them bad retirement plans for their workers. For our series Your Money And Your Life, here's NPR's Chris Arnold.

CHRIS ARNOLD, BYLINE: Here's the problem - many people running small and midsized companies around the country, they're really not good at setting up 401(k) plans for their workers. They don't know much about saving and investing, and that's understandable. They're in business because they're really good at other things.

ERIC LIPKE: We make tools smaller than a human hair in diameter.

ARNOLD: That's Eric Lipke. He's president of Midwest Industrial Tool Grinding Inc. It manufactures tools for medical devices.

LIPKE: We're based here in Hutchinson, Minn. We have about 55 people.

ARNOLD: And Lipke says he and the company owners here want to offer good benefits so that they can attract and keep good workers.

LIPKE: You'd come and work here for 20 years, 30 years, whatever their working career is and when they're done be able to say, you know, I had really good health care. I have a great retirement plan.

ARNOLD: So five years ago, the company set up a plan. But Lipke still doesn't have any idea if it's a good 401(k) plan.

LIPKE: We don't know where to find help for that.

ARNOLD: So actually we found him some help. We put Lipke and his new HR person, Sheila Murphy, in touch with someone who studies all this, a professor at the Wharton school at the University of Pennsylvania.

LIPKE: We're going to get a Wharton professor on the phone in a little bit to tell us whether it's a good plan or a bad plan or an ugly plan or whatever.

ARNOLD: That sounds good.


KENT SMETTERS: Hi, this is Kent.

SHEILA MURPHY: Hi, this is Sheila Murphy and Eric Lipke from MITGI in Hutchinson, Minn.

ARNOLD: Murphy and Lipke here have just called up Professor Kent Smetters and put him on the speakerphone.

LIPKE: Hello professor.

SMETTERS: Hi, good to meet you, Eric.

LIPKE: Good to meet you, too.

ARNOLD: So we asked Smetters to take a look at this company's plan. And Murphy and Lipke are right now asking him what he thinks.

SMETTERS: I would say between, you know, good, bad and ugly, you know, I would put it between bad and ugly. You know, I think I've seen worse, but not by much. This really is a high-fee plan.

ARNOLD: The disclosure documents for the plan show that the workers pay about 2 percent in fees. That might not sound like much, but Smetters says it's really bad. Two percent a year of their entire life savings every year compounded over 30, 40 years, that small-sounding fee eats up half of your earnings over that period in your retirement account. So Smetters says this plan is sucking way too much money out of the employees' pockets.

SMETTERS: The good news here is that there's this great opportunity here for kind of shifting to a 401(k) plan that's really going to deliver your workers a higher return over time.

MURPHY: Thank you. This is Sheila. That's our hope. We are a little bit nervous that our employees will feel like we weren't more responsible sooner...


MURPHY: ...To look at the plan, which - it's going to be hard to tell them that, you know?



ARNOLD: Smetters says the problem here - and it's the same at many companies - is that basically this plan was set up by a financial adviser who's also a sales guy. Many advisers have incentives to set up plans full of mutual funds with high fees because that's a way that they get paid. And the salesmanship was on display at the company the next morning. A new employee, Justin Johnson, was about to enroll in the 401(k) plan.

JUSTIN JOHNSON: Right now, I think I'm just going to put 5 percent in. Currently, my fiancee is in the end of her master's program, so I kind of watch the pennies a little bit.

ARNOLD: Sheila Murphy, the HR person, explains that to enroll in the 401(k) plan, new workers call up a financial advisor with a company called EFS advisors.

MURPHY: We're going to call EFS.


ARNOLD: The adviser didn't want me to record the phone call and declined an interview. But he knew I was in the room reporting this story during the speakerphone call.


ARNOLD: The new employee asked how high the fees were on the plan, and the adviser told him that the fees were 1.5 percent. But actually, they're higher than that. And the adviser went on to say that those fees make the plan, quote, "extremely competitive."

IAN AYRES: He misrepresented the truth.

ARNOLD: Ian Ayres is a law professor at Yale University who studies 401(k) plans at thousands of companies across the country. He says the fees in this plan are three times higher than extremely-competitive plans. So right in front of a reporter, the financial adviser appears to be saying things that just aren't true.

Is that even legal?

AYRES: No. It's - to misrepresent the truth in that way is almost certainly not legal.

ARNOLD: Ayres agrees with Smetters that this company got saddled with a bad plan that's too costly for the workers. And he's seen this before, especially at smaller companies.

AYRES: Sadly, the high costness is both outrageous and all too prevalent. There are billions of dollars in excess fees being charged each year to American workers.

ARNOLD: As for EFS Advisors, the company declined repeated requests for an interview or a comment. But we called the trade group the Investment Company Institute. Sarah Holden is a research director, and we asked her about studies that find that many 401(k) are overpriced.

SARAH HOLDEN: They've been able to measure fees. That's something that's reported. What none of the studies have done is look to see well, what was the range of services that were being included?

ARNOLD: So a plan might cost more, but employees might get things like lots of access to financial advisers. Of course, some plans could still be way overpriced. But Holden says look, businesses just need to shop around.

HOLDEN: And it's their job to make sure that the services that they're getting for the fees that they're going to be paying are reasonable.

ARNOLD: Since we visited Midwest Industrial Tool Grinding, the company has shopped around. They just got a quote from a major mutual fund firm for a plan with total annual fees of 0.64 percent. The workers are paying about three times more than that now. Chris Arnold, NPR News.

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