Lessons for You From Fidelity's $12 Million 401(k) Settlement

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For many workers, 401(k) plans offer a great way to set aside money for retirement, with huge advantages like tax-deferred growth and immediate income-tax savings for contributions. But the plans aren't perfect, and even the largest retirement-plan company in the U.S. had to deal with allegations from its employees that it wasn't treating them fairly.

Last week, financial giant Fidelity Investments agreed to settle two lawsuits that its employees filed. In the lawsuits, workers complained that they thought excessive record-keeping fees and high-cost mutual fund choices violated Fidelity's fiduciary duty toward its employees. Fidelity paid $12 million to settle the claims -- an average of $240 for each of the 50,000 plan participants who were part of the class action.

In settling the lawsuits, Fidelity didn't admit any wrongdoing, and company spokespeople dismissed the merit of the claims. But going forward, Fidelity workers will see some changes to their plan, and Fidelity's actions could lead to further litigation from employees at other companies who are frustrated with their investment options.

Let's take a look at three aspects of the Fidelity litigation that could help you in deciding whether your 401(k) plan at work makes the grade.

1. Beware If Fund Options All Come From the Same Provider

One allegation that employees was that all 150 funds that Fidelity offered as investment options in its 401(k) plan were Fidelity funds or funds from Fidelity subsidiaries. As part of its settlement, Fidelity will add some non-Fidelity funds to its 401(k) investment menu.

%VIRTUAL-WSSCourseInline-1023%Most employers don't offer their employees anywhere close to 150 choices, but it's not uncommon to see a single provider for all the options. Just because your employer makes a deal with a single financial institution doesn't automatically mean that your 401(k) plan is bad, let alone that you have any legal remedy against your employer. But be sure to ask your employer about the nature of its relationship with the company managing the funds, with special attention to any fee-sharing arrangements. Sometimes, investment providers offer discounts to employers with the hope that they'll exclusively offer their funds to employees in their 401(k) plan, and that can lead to your paying more or getting less performance.

2. Make Sure There Are Some Low-Fee Choices

Fidelity's plan participants argued that 85 percent of the nearly $8.5 billion in its 401(k) plan was invested in higher-cost mutual funds. Even though Fidelity did have some index-fund options in its menu, workers thought that management costs were excessive.

Here, workers don't have much reason to argue, as it's entirely up to them how they choose to invest their contributions to their 401(k) plans. If index funds are available, you have to make the decision to use them -- and if you don't, you can't later complain that you paid too much. That said, some employers don't make any low-cost index funds or other investment options available to workers. In that case, workers should work harder to get lower-cost options into the investment menus.

3. Look for Independent Management

It might seem natural for Fidelity and other financial institutions to manage their own retirement plans. But without an outside independent third-party provider, it's hard for an institution to prove that it's meeting its fiduciary duty to its employees. Fidelity workers argued that the proper thing to do would be to follow the lead of rival TD Ameritrade (AMTD) and outsource its record-keeping and administration.

Unless you work for a financial company, you probably won't face this situation. But it's always best to know the full extent of the relationships among the parties involved with your 401(k) plan's administration to ensure that there aren't any conflicts of interest.

Be Careful With Your Retirement

Workers might not believe that they have much latitude to have an impact on their employer's retirement plan. But given how hard companies work to give employees the retirement benefits they want, you have more leverage than you might think to encourage your employer to make positive changes to your 401(k) plan.

Motley Fool contributor Dan Caplinger owns no shares of any company mentioned. The Motley Fool recommends and owns shares of TD Ameritrade. To learn more on ensuring a comfortable retirement for you and your family, see our free report in which Motley Fool retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule to boost your retirement income.