Is your employer using your 401(k) to rip you off?

Is your employer profiting from the money you've been saving in your 401(k) plan? Incredibly, the recent class-action lawsuit against Wells Fargo alleges that the company has been doing just that — profiting off of their employees' retirement savings.

To be fair, Wells Fargo isn't the only company that's been accused of this. It's been suspected that many firms in the financial services industry have been self-dealing, while entities in other sectors, including some prominent universities, have been accused of charging their employees excessive fees in order to keep their own costs down.

In theory, an employer offers a 401(k) as a fringe benefit to not only help their employees save for retirement, but also to attract top talent to remain competitive in the marketplace. It would seem reasonable to the average person that workplace benefits are a form of compensation and that some (or all) of the burden of those benefits should fall to the employer. After all, this is what occurs with other benefits, such as health insurance and vision and dental plans.

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But while many companies pass on some of the costs of their retirement plans to their employees, some companies are actually benefitting financially when their employees participate in their plan.

Consider the case of Wells Fargo. As a financial services firm, it manufactures its own line of mutual funds and some of these funds are options within the company's own 401(k) plan. One might argue that Wells Fargo is proud of its funds and is simply giving its employees the chance to invest in a good product.

Here's where things get dicey. According to the complaint, one of Well Fargo's target-date mutual funds was a "default option" within the plan, and this fund contained fees that were three times that of a low-cost competitor.

So, where did these extra fees go? To Wells Fargo.

When an employer establishes a 401(k) plan, there are numerous costs that need to be covered, including, but not limited to, start-up fees, compliance costs and ongoing administration. One way that employers have avoided paying some (or all) of these costs is by passing along the expenses to their employees. How have they done this? By stuffing their 401(k) plans with high-cost, often proprietary funds, and then using those additional fees to offset their own expenses.

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So how do you know if your employer is making a profit off of your retirement savings? And if it is, is there anything you can do about it?

Start by examining the line-up of mutual funds offered within your 401(k) plan. If you notice that some of these funds are manufactured by your employer, this should raise a red flag.

Unless your employer is a low-cost investment manager, you're probably best off avoiding these and instead selecting those funds that have very low expenses (assuming you have those options available to you).

However, if you're like the majority of people and are not employed by a financial firm, you'll want to check to see if your firm offers low-cost index funds. If not, you have every right to question why it doesn't.

Another way companies lessen their costs is by sponsoring 401(k) plans that use expensive insurance contracts or front-load mutual funds. If you notice your plan only contains high-expense funds, that is a pretty clear sign that your employer is passing along the expenses to you.

"Good savers should not be held responsible for greedy plan management, nor should they have to pay for coworkers who don't take saving as seriously as they should."

This may not be a big issue for someone who has next to nothing saved in his or her retirement fund, but for a person who has a substantial balance, that person is bearing the costs for not just his or her own retirement fund, but perhaps for those of co-workers, as well.

A major problem with the 401(k) system is that we, as workers, are reliant upon our employers to offer us a retirement savings plan. Simply, if you want to save as much as you can for retirement on a tax-favored basis, you're pretty much stuck with your employer's plan. You legally can't defer nearly as much to an individual retirement account, nor, obviously, can you take advantage of the great plan that your next-door neighbor's company offers.

So what can you do if your employer's 401(k) plan stinks?

First, contact your employer and point out the problem(s). Your employer has a fiduciary responsibility to offer a plan that is in your best interest — not its own. If it doesn't remedy the situation, not only will it have dissatisfied employees, but could find itself in a lawsuit or in trouble with regulators, who can be very responsive to anonymous employee complaints.

Second, if your 401(k) plan offers in-service withdrawals (some plans allow this), transfer however much the plan will allow into an IRA, where you'll have full control of your funds.

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Third, see if it makes sense for you to reduce your 401(k) deposits to the level that will provide a full employer match (get that free money), and then direct the remainder of your retirement savings into a Roth IRA (limited to $5,500 if you are under age 50, and $6,500 if age 50 or older).

As an example, let's say you are contributing $8,000 per year into your 401(k), yet your 401(k) only requires you to contribute $5,000 to receive the full company match. In this case, it may be best to reduce your 401(k) contributions to $5,000 per year and then direct $3,000 into a Roth IRA.

Finally, petition your congressman or senator to broaden your retirement savings beyond your employer. The only thing that prevents you from saving in an IRA of your choosing versus being stuck with your employer's options is, I'm sorry to say, our outdated legacy tax laws.

Saving for retirement is already difficult enough without having to foot your company's bill for the plan. Not only do these fees quickly add up, but good savers should not be held responsible for greedy plan management, nor should they have to pay for coworkers who don't take saving as seriously as they should.

— By Scott Hanson, co-CEO of Hanson McClain Advisors