What Fidelity Employees' 401(k) Fight Means For Your Retirement

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401(k) plans are a retirement investing staple. But they've drawn criticism from many corners, from an Economic Policy Institute study that showed how 401(k)s have raised the level of inequality among retirees to a Los Angeles Times article discussing how small-company employees pay much higher fees than their large-company counterparts.

Amid the controversy, though, one new battle stands out.

More than two dozen employees at retirement-plan provider Fidelity Investments have joined a proposed class-action lawsuit filed earlier this year against their employer over its own 401(k) plan, arguing that it doesn't meet the company's fiduciary duty to give employees the best options available.

When 150 Funds Aren't Enough

The lawsuit strikes at the heart of what employers have to provide in their 401(k) plans. At first glance, Fidelity's 401(k) plan seems to be relatively generous, with a dollar-for-dollar match of up to 7 percent of employees' salaries. Moreover, the plan includes more than 150 different fund options covering just about every type of investment available to investors generally.

But the employees in the lawsuit argue that every single one of those 150 funds is managed by Fidelity, and many of them carry higher fees than comparable funds from outside providers. In particular, the plaintiffs pointed to new Fidelity funds without established track records as well as poor-performing funds as being inappropriate choices. It also suggested that using an institutional asset manager could have produced cost savings of 72 percent compared to certain target-date funds made available to employees.

Plaintiffs' attorney Gregory Porter described the Fidelity plan as "being run like a small company plan. Instead of investing in low-cost institutional funds, the plan's fiduciaries have put the plan in dozens of expensive mutual funds." Yet a Fidelity spokesman described the suit to Investment News as being "totally without merit."

What 'Fiduciary Duty' Means

Both sides have arguments that are easy to understand. Employees point to Fidelity's exclusive use of its proprietary funds. Fidelity, meanwhile, is in the business of providing 401(k) services and therefore can make the case that it's a logical choice to provide them for its own workers. Further, its funds have relatively modest fees compared to some of its fund-company competitors.

%VIRTUAL-article-sponsoredlinks%The specifics of the Fidelity lawsuit arguably apply only to employees at financial institutions that themselves participate in the 401(k) business. But for millions of Americans who work outside the 401(k) industry, the question is deeper: How much flexibility do companies have in balancing 401(k) features with costs to produce solid plan offerings?

Employers can sometimes cut their own administrative costs by choosing plan providers that charge them less, and instead charge higher expenses directly to employee 401(k) accounts. Without that option, some employers might simply choose not to offer 401(k) plans at all, taking away a valuable tool for employees to save for their retirement.

Making Your Own Smart Choices

One fact from the Fidelity lawsuit that's striking, however, is that 84 percent of the assets invested in the company's plan by its employees were invested in actively managed Fidelity funds.

The reason that's important is that even though the vast majority of the funds that Fidelity made available to employees were actively managed, they still had access to some lower-cost index-fund choices. In other words, even though employees could have put 100 percent of their money into those low-cost choices, they didn't. They made their own affirmative decisions to pay more for Fidelity's active management.

As you consider your own 401(k) plan investment options, keep in mind that no matter how good or bad your overall plan might be, there might be at least one or two solid investment options that you can select, enabling you to avoid the inferior choices. By focusing on minimizing costs, you can make sure more of your hard-earned returns end up remaining in your retirement account.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

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What Fidelity Employees' 401(k) Fight Means For Your Retirement

For the best chance of maintaining your lifestyle in retirement, aim to contribute 15% of your salary, including any employer match, to your 401(k) or other savings account throughout your career (see What's Your Retirement Number?). Most people fall short of that benchmark. The average employee contribution to a 401(k) is 6% to 8%.

Saving 15% may seem like lifting weights at the gym for several hours. Try it anyway, says Stuart Ritter, a financial planner and vice-president of T. Rowe Price Investment Services. "Kick your contribution level up to 15% for three months. At the end of the three months, you can lower it, if necessary." But rather than dipping back to single digits, go with 10% or 12%, he says. "People find they can settle on a much higher amount than they were contributing before."

Procrastination is another risk: With each year you neglect to save, you lose an opportunity to fuel your accounts and to let compounding keep the momentum going.

So powerful is the effect of saving early that you could have less trouble catching up if you take a several-year break-say, to pay for college-than if you wait until midlife to start. At that point, says George Middleton, a financial adviser in Vancouver, Wash., "the amount of money you have to put away can be ungodly."

Still, you can make headway, especially if your kids are grown and you have fewer expenses. Say you're 55, earn $80,000 a year and have nothing saved for retirement. You put the pedal to the metal by setting aside $23,000 in your 401(k) each year for the next ten years. That $23,000 combines the annual maximum for people younger than 50 ($17,500 in 2013) plus the annual catch-up amount for people 50 and older ($5,500). If your employer matches 3% on the first 6% of pay and your investments earn an annualized 7%, you'd amass $434,700 by the time you reached 65.

For some investors, a bad case of the jitters became a bigger derailer than the recession itself (see How to Learn to Love [Stocks] Again). "People got very nervous and became more conservative, so when the market came back up, they had less of their port­folio participating in the rally," says Suzanna de Baca, vice-president of wealth strategies at Ameriprise Financial.

You can get back in (and stay in) by investing in stocks or stock mutual funds in set amounts on a regular basis. Using this strategy, known as dollar-cost averaging, you automatically buy more shares at lower prices and fewer shares at higher prices-an antidote to market-driven decisions. Once you decide on your mix of investments, use automatic rebalancing to keep it that way, advises Debbie Grose, of Lighthouse Financial Planning, in Folsom, Cal.

Most financial planners recommend that your portfolio be at least 80% in stocks in your twenties, gradually shifting to, say, 50% stocks and 50% fixed-income investments as you approach retirement. But formulas don't cure panic attacks. "Set your risk at the level you're willing to withstand in a downturn," says Middleton.

Amassing hundreds of thousands of dollars for retirement is challenge enough, but parents are also expected to save $80,000 to $100,000 per kid to cover the college bills. In fact, half of parents don't save for college at all, and the average savings among those who do runs about $12,000, according to a 2013 report by Sallie Mae, the financial services institution. Faced with a shortfall, two-thirds of families say they would use their retirement savings to pay for their children's college education, if necessary.

Don't wait until your kid is 17 to discuss how much you'll contribute. Have a conversation early about how much you can afford to give, says Fred Amrein, a registered financial adviser in Wynnewood, Pa.

A Roth IRA can be one way to save for both college and retirement, although it won't get you all the way to either goal. You can contribute up to $5,500 a year ($6,500 if you're 50 or older) in after-tax dollars, and the money grows tax-free. You can withdraw your contributions for any reason, including college, without owing tax on the distribution. You will pay taxes on the earnings (unless you're 59 1/2 or older and have had the account for at least five calendar years), but you won't have to pay a 10% early-withdrawal penalty if you use the money for qualified higher-education expenses.

Leaving the workforce, even temporarily, deprives you of current income and makes it tougher than ever to save for retirement. You might even find yourself tapping your retirement accounts to cover day-to-day expenses. You'll owe taxes on distributions from a traditional IRA plus a 10% penalty if you're younger than 59 1/2.

The best way to avoid that dismal situation is to have an emergency reserve that covers at least six months or even a year of living expenses, says Jim Holtzman, a certified financial planner in Pittsburgh. He acknowledges, however, that "that's easy to recommend and hard to implement." Avoid further disaster by hanging on to health insurance: If you can't get coverage through your spouse, look into keeping your employer-based coverage through COBRA. You can extend that coverage for up to 18 months, although you'll pay the full premium plus a small administrative fee. As of January 2014, you'll also have access to coverage through state health exchanges.

Married couples who depend on each other's earning power need life insurance to cover the gaps when one spouse dies. You can get a rough idea of how much coverage you'll need on each life by calculating what you each contribute to annual living expenses and multiplying that amount by the number of years you expect to need it, says Steve Vernon, of Rest-of-Life Communications, a retirement consulting firm. (For advice on how to do a more precise calculation, see How Much Life Insurance Do You Need?)

If you have a pension, you'll have the option of choosing a single-life benefit, which ends at your death, or the standard joint and survivor's benefit, which pays less while you're alive but keeps paying (typically at 50% to 75% of the benefit) for the rest of your spouse's life. Your spouse is legally entitled to the survivor's benefit and must sign a waiver to forgo it. Don't be tempted by the higher-paying single-life option if your spouse will need the survivor's benefit later.

Decisions you make in claiming Social Security are similarly key. If you're the higher earner (typically, the man), "you will really help your spouse by delaying Social Security as long as possible," says Vernon. The benefit grows by about 6.5% to 8% a year for each year you delay after age 62, when you first qualify, until you reach age 70. If you die first, your spouse can qualify for a survivor's benefit up to the full amount you were entitled to, depending on the age at which she files.

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