Some workers with employer-run retirement accounts such as 401(k) plans could be losing thousands of dollars because of regulatory or fiduciary violations.
For example, recently, Southwest Airlines Co. (LUV) was hit with a proposed class action lawsuit from its employees, which said the company offered poorly performing funds, causing employees to forgo millions in savings.
The majority of employees unknowingly have problems in their retirement accounts; nearly 84% of American retirement plans likely have at least one type of “infractions, fineable offenses, fiduciary failure, or plan malpractice,” a recent study from Abernathy Daley 401k Consultants found.
Investopedia spoke with Matt Daley, president of Abernathy-Daley, and Steven Abernathy, the company’s CEO, about these red flags within retirement accounts and how employees can educate themselves to spot them. The interview has been edited for brevity and clarity.
INVESTOPEDIA: How could red flags affect the savings in someone’s retirement account?
MATT DALEY: A lot of these red flags are going to be more impactful on the company or the plan sponsor.
When there’s a lack of attention to detail with the plan, if they have one or more red flags, often, they also have a ton of funds available to their employees that are underperforming and overpriced, relative to very similar funds. That is the biggest problem for employees because that really does impact their lifetime ability to save.
We find that when these red flags are occurring, the plan likely hasn’t been benchmarked in a long time. The plan sponsors likely just set and forget it, and the vendors—meaning the record keepers and the plan advisors—are probably not doing the best job. Then, the rot kind of spreads, and that’s when employees get impacted.
STEVEN ABERNATHY: If you could find a fund that was charging you 1.5% a year and change it to a fund that was charging you 0.1% per year over the next 30 years of your savings, that will mean hundreds of thousands of dollars to your retirement planning. It’s the difference between retiring in a lifestyle that you’re comfortable with and in a lifestyle with brackets around it.
Do you know how much you need to retire? Do you know what that number needs to be? It’s a magic number and calculable, and you need to know it… Do you know how much you need to save out of each paycheck to get to that number? These are 101-level questions that 99.9% of the employees just don’t think about yet, but they need to.
INVESTOPEDIA: What is the first step an employee could take to analyze their retirement and see if they catch any red flags?
DALEY: It’s the plan advisor’s and the plan sponsor’s job, ultimately, at the end of the day. [The job of] a fiduciary is to make sure that those red flags aren’t occurring.
But as an employee, the best thing to do, first of all… comes back to education. So now, is the plan advisor doing a good enough job of educating employees? Every employee should have the opportunity to meet one-on-one with them and get their number.
Hopefully, the plan sponsor of the company is benchmarking their plan regularly. If they are then an employee could theoretically ask the head of HR, ‘Have you guys been benchmarked recently? Can I look at that benchmark?’
ABERNATHY: [A benchmarking analysis] is just an audit of your retirement plan, and it compares your retirement plan to all of your other competitors.
These benchmarking analyses are done by independent third parties, so there’s no bias. They’re not that expensive, and they should be done every year.
INVESTOPEDIA: What should an employee do if they do find red flags within their retirement account?
DALEY: For the majority of them, I think the first call or email is going to be to HR and say, ‘Hey, are you guys aware of this? What’s being done to rectify it?.’
ABERNATHY: [An employee’s] retirement plan is 30 years away, or it’s 15 years away, or it’s nine years away, and it’s sort of an afterthought. ‘I’ve got 15 deadlines I’ve got to meet, or I’ve got things I’ve got to do. We understand that, but asking HR if their plan was benchmarked each year and asking them to send a copy of the benchmarking analysis to them is sort of like you’re sitting in the passenger seat saying, ‘Hey’ to whoever it is driving. ‘You’re going 85 in a 65. Are you aware of that?’
DALEY: Having that transparency, I think, is beneficial. You want to know that your retirement is in good hands.