Legalized 401(k) Fraud

There are a litany of laws protecting participants from fraud that have helped victims recover their money, but these laws only deal with theft. Fraud can still occur in the absence of outright theft in the form of mere misappropriation of assets, which is a form of embezzlement, defined by the Cornell Law School Legal Information Institute as:

“The fraudulent taking of personal property by someone to whom it was entrusted. It is most often associated with the misappropriation of money. Embezzlement can occur regardless of whether the defendant keeps the personal property or transfers it to a third party“.

And it defines misappropriation as follows:

“(1) Obtaining or exercising unlawful possession over the property of another with the purpose to deprive the owner of the property.

(2) Obtaining property or services offered for sale or compensation without making payment or offering to pay.

(3) Obtaining property or services offered for sale or compensation by means of deception or a statement of past, present or future fact that is instrumental in causing the wrongful transfer of property or services, or using stolen, forged, expired, revoked or fraudulently obtained credit cards or paying with negotiable paper on which payment is refused.

(4) Concealing unpurchased merchandise on or about the person without the knowledge or consent of the seller or paying less than purchase price by deception.

(5) Acquiring or possessing the property of another, with knowledge or reason to believe that the property is stolen.”

#3 applies to the obtaining of services for compensation paid by participants that are not commensurate with the level of services provided. For example, I have documented many instances where financial advisors receive significant and increasing annual compensation despite not providing any services at all and where plan sponsors pay record keepers and administrators increasing annual compensation without making an effort to negotiate or thoroughly compare their services to other comparable providers. These actions demonstrate a failure to meet the reasonable person standard:

“The so-called reasonable person in the law of negligence focuses on how a typical person, with ordinary prudence, would act in certain circumstances. The test as to whether an individual has acted as a reasonable person is an objective one, and so it doesn’t take into account the specific abilities of a defendant. Thus, even a person who has low intelligence or is chronically careless is held to the same standard as a more careful person or a person of higher intelligence.”

Unfortunately, this type of financial abuse primarily occurs in smaller plans that the Department of Labor lacks the resources to focus on and litigation firms don’t care about because they don’t have enough money to make pursuing legal action worth their time. So if you are a participant in your company’s retirement plan, it’s up to you to let your employer know about the excessive fees you are being charged. See my previous post if you want to know how you can take action.


How employees can encourage their employers to create a better retirement plan

Understanding how your company’s retirement plan works can be intimidating. Many people know they have a list of investment options, but don’t understand them and all of their associated costs. Unfortunately, the employers have little understanding either, primarily due to not having an incentive to care as I explained in a previous post.

I created a list of questions participants can ask their employers to help with this process, but many employees fear confronting their employers. While employees can’t get around this issue because the employers will always have the decision-making power, they can find out quite a bit of information on their own.

One way they can gather information is to look up their retirement plan tax form known as form 5500. They can either go to the Department of Labor’s website or set up a free account at Some plans will disclose some or all of the service provider fees such as advisory, record keeping, administration, and custodial fees, all of which I have explained in more detail here.

Another way is to contact the record keeper and ask for the 408b-2 or 404a-5 fee disclosure for employers and participants. The record keeper is the party who sends out statements and provides a website such as Fidelity, Principal, or John Hancock. They should be able to quickly provide this information. Even if they won’t provide the employer fee disclosure, you can still figure out what the total fees are by dividing your assets by the total plan assets, which can be found on the 5500 form noted above. For example, if you have a balance of $100,000 and the total plan assets are $1 million, then you can multiply your fees by 10 to get an idea of what the total fees are. However, depending on the record keeper, the fees may not be shown on the 404a-5 participant fee disclosure, and even if they are, this type of calculation will not always be a precise way to measure the total fees, so employers are in a better position to obtain this information.

At the very least, by gathering information about their own fees and letting their employers know about other record keepers and administrators who are often not included in fee benchmarking searches and offer more affordable pricing (shown here) and raising questions about the reasonableness of the advisory fees if they haven’t had any contact with the advisor, employees can help their employers conduct thorough due diligence. This way, employees might be more receptive to employees’ concerns.