One of my favorite stories of 401k plan hazards comes from the time Ameriprise Financial was sued… by their own employees… for, in my opinion, ripping them off with the investment options in the 401k plan. Here’s a link to an article from 2015. Basically, some employees took a look at the investment “menu” in their 401k plan. They found a lot of funds that were managed by… you guessed it, Ameriprise! Now this wouldn’t be a problem on its own, but I bet you could guess these proprietary funds weren’t cheap. And indeed they weren’t! Here’s the relevant quote from the article:
The Ameriprise plaintiffs claimed that investments in the company’s 401(k) plan included funds from the firm’s subsidiary RiverSource Investments, which is now known as Columbia Management Investment Advisers.
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The plan participants also allege that the funds were costly. For instance, they alleged in their suit that the cost of target date funds from RiverSource ranged from 84 to 92 basis points, which was 74 basis points more than an alternative from Vanguard.
Costs matter
It may not seem like it, but 74 basis points (or 0.74%) is a big difference. If you had a $1,000,000 in the plan, you would pay an extra $7,400 per year. I’m sure that was the big motivator for filing the lawsuit. We can assume that Ameriprise’s employees are well versed in financial matters and the minutiae of 401k plans. (Or at least they should be as they advise people on such matters.) So it’s kind of funny that Ameriprise didn’t even have enough respect for their own “expert” employees to give them a fair deal. If they are comfortable treating their employees this way, how do you think they feel about their customers and clients?
It’s important to mention that TDFs are among the most popular investment choices for 401k plans. They are simple and provide a nice asset allocation “glide path.” So these weren’t some esoteric investment choices meant for a few individuals who might want exposure to an alternative asset class. These were the bread and butter offerings for the plan. So it appears as if they were chosen to maximize revenue for the firm.
Why people hate the financial industry
This is the sort of stuff that makes people hate the financial industry. Why can’t financial companies strive for simple, transparent disclosure and fair dealing? Unfortunately, it’s a sad state of affairs when it takes litigation to enforce even the most basic standards of fairness.
In the end, Ameriprise ended up paying $27.5 million to settle this lawsuit. Only took them 4 years and an impending trial date to get moving on it. Ameriprise also kind of tried to claim victory:
“We have a strong 401(k) plan that is administered for the sole interests of participants,” Ameriprise spokesman John Brine said. “The settlement doesn’t require any changes to our plan, which will maintain the existing broad and competitive selection of options and features.”
Mr. Brine added that the plan has always featured funds managed by the firm as well as investment options from other providers, and a brokerage window.
Pretty weak if you ask me. If I was designing a 401k plan, I would avoid my own firm’s funds simply because I wouldn’t like even the appearence of a conflict. I might send out the following email to all the 401k participants:
“Hey everyone, we love our colleagues at RiverSource and think they do a great job. But we don’t want you all to second guess our intentions, so we’re going to use the target date funds from Vanguard, which are… uh… a lot cheaper.”
Watch your back
The lesson here is to watch your back when it comes to your finances. It’s nice to be able to trust your financial firm, but don’t hesitate to put in safeguards against bad behavior. Even the best financial firms can have incentives to lead you down the wrong path. If you’re a business owner, consider using a flat fee financial advisor to help review your 401k plan and see if it provides the best value for you employees. Or at the very least insist on straightforward disclosure of details from your current 401k provider.
