Keep a Watchful Eye on Your 401(k)

Many of the 80 employees at Westbrook, Conn.-based Emergi-Lite felt ripped off two years ago when their employer announced the company was moving to South Carolina. Soon afterward they learned they had been robbed in a more literal way--their 401(k) money was gone.

The lighting company’s investment manager was sentenced in October to four years in prison for stealing $1.1 million from the retirement plan. Prosecutors said the trustee spent the money on around-the-world vacations, golf trips, credit card bills and homes in Connecticut and Florida.

Actual theft of 401(k) funds is rare, according to government regulators. But benefits experts say employees can be chiseled in numerous ways, both legal and illegal. The upshot is the same: Money that should be going toward employees’ retirement is instead siphoned off for other purposes.

Among the most common--and legal--drains on retirement money are plans that charge excessive fees. A report by the Department of Labor last year found that some 401(k) providers charged fees that were several times higher than those for other companies offering similar investments.

And increasingly it’s the employee, rather than the employer, that bears the cost, Labor Department officials said.

“For many plan sponsors, price is not high on the list of considerations that are used to select a plan provider,” the report concluded. Instead, companies often turn to banks, insurers or other companies already providing them financial services “and may not make an independent search for the lowest-cost provider.”

High fees take enormous tolls on retirement saving power. An employee who contributes $10,000 a year to a 401(k) plan and earns 10% a year, for example, can expect to have a nest egg worth $1.8 million after 30 years. If fees whittle her return by 1%, her total will be under $1.5 million, or $300,000 less.

A 2% fee is even more devastating, costing nearly $600,000 in lost returns over that time.

Employees also can be cheated by having too few options or options that perform poorly.

Employers have little excuse for costly or skimpy plans, benefits experts say. Traditionally, smaller companies were often stuck with pricier plans with limited options, but competition among retirement-planning companies has increased the quality and decreased the cost of many available plans.

Some companies hurt their employees’ returns by failing to deposit their contributions quickly.

Companies are required by law to deposit retirement contributions within 15 days after the close of the month in which the money is deducted from an employees’ paycheck. But not all do.

“Companies have cash flow problems and they use the money to pay bills,” said Dan Maul, an employee benefits consultant in Kirkland, Wash. “If they do that, it’s pretty tough [for government regulators] to catch.”

Sometimes employers can legally dip into an employee’s retirement kitty, however.

Orange County employees found that out in 1995 after officials seized 10% of their deferred compensation balances to pay bills during the county’s infamous bankruptcy proceedings.

Unlike 401(k) and other qualified plans, deferred compensation--also known as 457 plans--are not exempt from creditors’ claims or raids by employers to pay those claims.

The money was later restored, with interest, but not before the incident rattled many public employees’ confidence in the safety of their plans.

When money is stolen, employees often have to rely on company insurance settlements or lawsuits to recover their money. 401(k) and other qualified plans known as defined contribution plans are not covered by government insurance. Only defined benefit plans--pension plans that promise a set benefit in retirement--are insured through the government’s Pension Benefit Guaranty Corp.

Emergi-Lite’s owner said employees will be repaid with a $2-million settlement from the company’s insurer. Employees are pressing on with a lawsuit, claiming that their total losses were more than $3 million when lost investment returns are considered.

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How to Protect Yourself

Here’s what you can do to help protect your retirement money from being robbed:

* Scan your statement. Late, skimpy or vague statements can be a sign of trouble. Your plan administrator should be able to describe exactly how your money is invested and give you a list of the plan’s investments. This is not fool-proof, however; Emergi-Lite’s trustee provided detailed, on-time statements that kept employees in the dark.

* Match your pay stub to your statement. Contributions should be credited to your account soon after they’re taken out of your paycheck. If the company delays more than 15 days after the end of the month in which your contribution was deducted, contact the Department of Labor’s Pension and Welfare Benefits Administration at (202) 219-8776.

* Bigger may be better. Plans managed by large, nationally known firms are far less likely to be the targets of fraud than those run by one-person investment companies--as Emergi-Lite’s plan was.

* Become even more vigilant if your company experiences financial problems. Smaller employers especially may begin to delay contributions or use retirement plan money to pay other expenses.

* Talk to employees who have recently left the company. One red flag can be when former employees have trouble withdrawing funds or getting money rolled over into another account.

* Monitor your investment costs. Find out how much it costs to invest your money and who’s bearing the brunt--yourself or your employer. Compare your costs with fees charged by similar investments. The typical stock mutual fund has investment costs of about 1.5% in fees, for example, while a stock index fund can cost less than 0.5% a year.

* Lobby for better choices. The typical 401(k) plan offers seven to eight choices, including at least one stock fund and one fixed-income or stable value fund. Many plans offer international funds and stock index funds as well. Too few choices can hamper your investment returns or increase your risk.