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Time Business News
4 days ago
- Business
- Time Business News
Fiduciary Breaches Could Quietly Undermine Retirement Accounts, Study Shows
A new analysis from J. Price McNamara spotlights how hidden fees and fiduciary missteps within employer-sponsored retirement plans can significantly erode long-term savings. Based on recent litigation trends and federal data, the study examines how fiduciary breaches under the Employee Retirement Income Security Act (ERISA) are becoming increasingly costly for millions of American workers. Plan administrators carry a legal duty under ERISA to act in the best interest of participants. This includes monitoring service providers, controlling fees, and maintaining fee transparency. When these responsibilities are ignored or poorly managed, participants may face steep losses over time. The financial impact can be substantial. Data cited in the study shows that even a one percent increase in retirement plan fees can reduce total savings by up to 28 percent over 35 years. That reduction could amount to tens or even hundreds of thousands of dollars for individual account holders. A chart from the Department of Labor illustrates how savings accumulate under different fee scenarios, assuming steady contributions and returns over time. Recordkeeping fees offer a clear example. While competitive rates hover around $35 per participant annually, some plans pay as much as $150 per person. These inflated charges suggest a failure to negotiate fair rates or to vet service agreements thoroughly. Investment choices also raise concern. Analysis of data from the Investment Company Institute indicates that 67 percent of retirement plans still use higher-cost retail-class mutual fund shares, despite the availability of lower-cost institutional alternatives. This decision, often overlooked, increases participant costs without improving performance. Benchmarking can help control these expenses. Administrators are expected to compare their plan's fees against similar offerings. Failure to do so may result in participants absorbing fee increases of up to 13 percent. When benchmarking is ignored, plans may drift further away from industry standards, placing additional strain on future retirement security. Litigation linked to excessive retirement plan fees has surged in recent years. According to statistics reviewed by J. Price McNamara, more than 200 class-action lawsuits have been filed since 2015. In 2020 alone, 90 suits targeted employers for fiduciary violations. Between 2017 and 2021, excessive fee litigation rose by over 50 percent. Notable settlements underscore the risks of noncompliance. In 2019, MIT agreed to pay $18.1 million to resolve claims of excessive fee practices. That same year, Johns Hopkins University settled for $14 million. These outcomes reflect growing legal and financial exposure for plan sponsors and fiduciaries who fail to maintain adequate oversight. Participants have legal options when fiduciary duties are breached. Administrators must regularly disclose all fees and adjust plan structures to keep costs competitive. If savings have been diminished due to excessive charges, individuals can pursue restitution through legal action. Successful claims not only help restore lost funds but often lead to improved management and oversight practices. The study concludes that recent regulatory changes have improved fee disclosure requirements, yet many plans still fall short. Inadequate governance, lack of transparency, and poor provider oversight continue to drive legal challenges. With litigation rates climbing, awareness of one's rights as a retirement plan participant has never been more important. J. Price McNamara's research emphasizes the need for proactive financial literacy and regulatory enforcement. Retirement security depends not only on contributions and returns but also on how well fiduciary responsibilities are upheld. TIME BUSINESS NEWS
CNBC
13-07-2025
- Business
- CNBC
Coming to a 401(k) near you: Private market assets
Apollo Global Management CEO Marc Rowan told attendees at an investor conference last month that the day will soon come when private assets are accessible in Americans' retirement accounts. "I would expect at some point, in this administration's history or in the future, to be able to sell private markets into the 401(k) system," Rowan said on stage at the Morningstar Investment Conference in Chicago, Illinois, where the convergence of private and public markets was a major theme. Those comments come as no surprise from the billionaire CEO, who has long stressed the growing importance of private markets in investing. However, the idea is reaching a tipping point. Private market exposure in 401(k) plans was considered permissible in 2020, when the Department of Labor under the Trump administration issued an information letter indicating it could be appropriate for defined contribution plans under certain conditions. The guidance was later affirmed by the Biden-directed agency. But its presence is starting to expand. Asset managers and plan sponsors have created products for retirement vehicles in which Americans collectively hold roughly $8.7 trillion in assets, according to data on 401(k)s at the end of the first quarter of 2025 from the Investment Company Institute . In June, BlackRock, the world's largest asset manager, said it's launching a 401(k) target date fund in the first half of 2026 that will include a 5% to 20% allocation to private investments. In May, Empower, the country's second-largest retirement plan provider, said it's joining asset managers such as Apollo to start allowing private assets in some accounts later this year. Those developments come amid a broader push under Trump's second term in office to expand the definition of "accredited investors" to allow more people to invest in private markets through their 401(k)s. Within the retirement plan industry itself, the conversation is reaching a fever pitch. Bonnie Treichel, chief solutions officer at Endeavor Retirement, said, "If you're at retirement plan-related conferences right now, this topic is all the rage, so to speak." Similarly, Fred Reish, a partner at law firm Faegre Drinker said: "It's not just out there somewhere on the horizon, I would say that's in the immediate future." How it works The strategies created for 401(k)s thus far will be coming in the form of pooled investments such as collective trusts, or managed accounts overseen by professional investors, instead of standalone investments assessed by individual employees. Adding private assets to target date funds, which automatically adjust allocations based on a retirement date, is one option that's growing in popularity in the industry. The structure of those investments are meant to address some of the regulatory concerns around the assets, which have traditionally been excluded from 401(k)s even as they were embraced by pension funds and university endowments. The treatment stems from the perception that private investments have risks such as a lack of transparency, which raises predatory concerns, as well as higher fees and long lockup periods. The 2020 Labor Department information letter also attempted to address those concerns, outlining that investments into private assets made within 401(k)s must be done with prudence, or held to the standard of a person who is "familiar with such matters," without which a company or an asset manager can open themselves up to legal ramifications. "If fiduciaries make a bad investment, not bad an outcome, but bad both in outcome and bad in that they didn't really vet it properly, they can be sued, and they can be personally liable for damages," said Reish, who specializes in the Employee Retirement Income Security Act of 1974 (ERISA) that governs employee retirement plans. "So, not just the company, but also each individual member of the plan committee. Each of those officers and managers that serves on the plan committee can be personally liable. That's frightening." Intel, for example, had a lawsuit dismissed earlier this year by a federal appeals court in San Francisco after a yearslong dispute over its use of alternative assets in its retirement plans. Additionally, what that could also mean is that larger plan sponsors, which have the internal capabilities to vet private investments, could move faster to integrate privates into a 401(k) plan, rather than smaller companies. The case for privates Still, there are several reasons for the excitement around private assets in 401(k) plans. Proponents point out that the investable universe has shrunk over the last three decades, roughly halving to about 4,000 companies from more than 8,000 back in the 1990s, according to the Center for Research in Security Prices. At the same time, the dominance of the largest public companies grows increasingly pronounced with each passing year. CRSP found that the market cap of the top 10 companies accounted for 35% of the total market in 2024, more than double what it was before 2020. Meanwhile, more companies are staying private for longer. The decision helps executives build their businesses away from the glare of regulatory scrutiny or responsibilities to shareholders, but also makes it harder for investors to get in on the ground floor of the next Microsoft or Apple. Thus, the argument goes, private assets will give investors exposure to a market that looks markedly different from what it had in the past — even if it requires locking up capital for longer periods of time at greater cost and greater risk. Still, there are many who worry the risks far outweigh any benefits, calling private investments far too opaque for plan sponsors to do appropriate due diligence. "Being private does not make it better. It makes it less liquid," Apollo's Rowan told investors at the Chicago conference. "Our job is to deliver excess return."
The Guardian
06-07-2025
- Business
- The Guardian
Born into crisis, gen Z is saving for retirement like no other generation
Research published at the end of last year by the Investment Company Institute with help from the University of Chicago found that gen Z – those born between 1997 and 2012 – are 'outpacing' earlier generations in contributing to retirement, having more than three times more assets in their 401(k) retirement savings accounts than gen X households had at the same time in 1989, adjusted for inflation. This mirrors a 2023 study from the TransAmerica Center for Retirement Studies, which found that gen Z is doing a 'remarkable job' saving for retirement with many putting away as much as 20% of their income towards the future. It's no wonder why. The oldest of this generation probably have early memories of the 2009-2010 financial crisis. They have lived through a global pandemic. Their social media accounts are frightening them with stories of political upheavals, global warming, indiscriminate violence, riots, chaos and anarchy. Older generations got this kind of news maybe once or twice a day. This generation gets it fed to them every minute. They yearn for security. And one way is to save their money. The question is, are they doing enough? What more could be done? Here are three things we should be considering. Thanks to the Secure2022 legislation, employers can now not only offer Roth 401(k) plans for their employees but can also contribute to those plans. We should all have one. That's because – within income limitations – contributions to a Roth 401(k) are made after taxes have been paid but then grow tax-free and can be withdrawn without any tax liability after the age of 59 1/2. gen Zers – who are likely to be paying less in taxes now due to their relatively lower salaries – can put this money away at lower rates, rather than just defer taxation to a future year when, under regular 401(k) rules, distributions become required. And they can let these sums grow without worrying about paying any more taxes in the future. As an employer, you can provide investment options that can help maximize their returns too. Another great after-tax vehicle is the 529 plan. By offering this plan, an employer can help their employees – both younger and older – put after-tax money away that will grow tax-free and can then be withdrawn if used to pay for higher education, private school or religious school. It's a great way for gen Zers to save for their future kids' education instead of paying for it out of funds that would be used for their own retirement years down the line. Health Saving Accounts have exploded in popularity over the past decade, and it's no surprise why. With these accounts – which need to be paired with a high deductible group insurance plan – employees can sock away pre-tax dollars to be used for medical expenses that are not reimbursed by their health plans. Gains and withdrawals are not taxed. The beauty of these plans is you don't have to use them or lose them – any unused balances just roll over to the next year. Some call it a 401(k) for healthcare, and they're not wrong. It's a great way for younger employees to put away money that could help pay for their future healthcare costs without interfering with their retirement savings. Agree or not, the Trump administration has reversed course with its predecessor and is now demanding student loan repayments. The result is that many younger people are going to need to face the reality of making good on their debt. One fallout will surely be less cash available to put away for retirement. But as employers, we can help. The Secure 2022 legislation now makes it legal for us to match their student loan payments with contributions to their 401(k) plans. This way even if they don't have enough funds to put away for the future, employers can help make up the difference. This is something we should all consider. As a certified public accountant, I have spent my life dealing with money – both my own and my clients'. And yet every day I learn something new and still have to rely on the internet to clarify and research financial questions that I have. Now, imagine being a 25-year-old trying to figure out all the options. It's impossible. A good employer should have an outside financial counselor on retainer who can provide one-to-one advice for their employees once or twice a year. My best clients do this. And it's not just about retirement. It's buying a house, getting insurance, owning a car … all the financial decisions that in the end affect what's left over for retirement. According to a recent Goldman Sachs survey 60% of gen Z respondents report 'having a personalized financial plan, not just for retirement but also for goals like buying a home or a car' and 68% 'believe their savings are on-track or ahead of schedule'. Sounds great. But I'm betting that 'plan' could be improved. Employers should be providing more help to help save for retirement. And the good news is that they have got a generation eager to take it.
CNBC
23-05-2025
- Business
- CNBC
Mutual funds can trigger hefty yearly capital gains taxes. Some lawmakers want to change that
If you own mutual funds, year-end payouts can trigger a surprise tax bill — even when you haven't sold the underlying investment. But some lawmakers want to change that. Sen. John Cornyn, R-Texas, this week introduced a bill, known as the Generate Retirement Ownership Through Long-Term Holding, or GROWTH, Act. If enacted, the bill would defer reinvested mutual fund capital gains taxes until investors sell their shares. Bipartisan House lawmakers introduced a similar bill in March. When you own mutual funds in a pre-tax 401(k) or individual retirement account, growth is tax-deferred. But if you hold assets in a brokerage account, capital gains distributions and dividends incur yearly taxes. More from Personal Finance:What the House GOP budget bill means for your moneyTax bill includes $1,000 baby bonus in 'Trump Accounts' House GOP tax bill passes 'SALT' deduction cap of $40,000 Depending on performance, some mutual funds can spit off substantial gains during the fourth quarter. In 2024, some paid double-digit distributions, Morningstar estimated. These payouts are subject to long-term capital gains taxes of 0%, 15% or 20%, depending on your taxable income. Some higher earners also pay an extra 3.8% surcharge on investment earnings. About $7 trillion of long-term mutual fund assets held outside of retirement accounts could be impacted by the legislation, according to the Investment Company Institute, which represents the asset management industry. In a statement Wednesday, Cornyn described the mutual fund proposal as a "no-brainer" that would "help provide parity with other investment options." If enacted, the proposal would "incentivize Americans to save and invest for their long-term goals" without the stress of an "unexpected tax bill," Eric Pan, president and CEO of the Investment Company Institute, said in a statement following the bill's introduction. However, it's unclear whether the bill will advance amid competing priorities. Lawmakers are wrestling over President Donald Trump's multi-trillion-dollar tax and spending package, which passed in the House on Thursday, and could face hurdles in the Senate. The U.S. Department of the Treasury has also asked Congress to raise the debt ceiling before August to avert a government shutdown. While deferring yearly taxes could benefit some investors, you could also make portfolio changes, financial experts say. You can avoid mutual fund payouts by switching to similar exchange-traded funds, or ETFs, which typically disburse less income, Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, previously told CNBC. Of course, the trade could also trigger taxes if the mutual fund has embedded gains, which may require some planning, he said. Alternatively, investors could opt to keep mutual funds in tax-deferred accounts, such as pre-tax 401(k)s or IRAs.
Miami Herald
15-05-2025
- Business
- Miami Herald
Major changes to 529 plan and HSA benefits may be in the cards
Nearly 10 million U.S. households-about 13% of the 74 million that owned mutual funds in 2024-identified education as a primary goal for their investments, according to the Investment Company Institute (ICI) Of those, 15%, 11.1 million households, reported owning 529 plans, the tax-advantaged accounts designed to help families save for future education costs. Related: Secretary Bessent hints Social Security income tax changes are coming As of year-end 2024, there were 16.1 million 529 savings plan accounts nationwide, with an average account balance of approximately $31,100. Total assets in these plans reached $500.6 billion. And while that's a meaningful sum, it represents just a fraction of the broader mutual fund market, which totaled $38.8 trillion in U.S. assets in open-end funds at year-end 2024. Don't miss the move: Subscribe to TheStreet's free daily newsletter Indeed, the ICI noted in its most recent yearbook that the demand for education savings vehicles has been moderate since their introduction in the 1990s, partly because of their limited availability and partly due to investors' lack of familiarity with them. Sebastian Latorre on Unsplash According to the ICI, households that save for college tend to skew younger and more educated. About 52% of households using 529 plans, Coverdell ESAs, or regular mutual funds and ETFs to save for education were under age 45. These savers also spanned a broad range of educational backgrounds: 63% had completed college, 19% had some college or an associate's degree, and 18% had a high school diploma or less. Related: Social Security income tax cuts may include a huge new deduction for retirees Income levels varied as well. More than a third, 35%, of college-saving households had annual incomes under $100,000, suggesting that education savings is not limited to higher earners. What most of these households had in common was children under age 18 at home, reinforcing the connection between early family planning and proactive education savings. And those savings are necessary, given the cost of education. Based on the most recent data from the College Board's 2024 "Trends in College Pricing" report, covering the 2024-2025 academic year: Public Two-Year Colleges (in-district students): The average total budget for full-time undergraduate students, including living expenses, was $20, Four-Year Colleges (in-state students): The average total budget for full-time undergraduate students, including living expenses, was $29, Four-Year Colleges (out-of-state students): The average total budget for full-time undergraduate students, including living expenses, was $49, Nonprofit Four-Year Colleges: The average total budget for full-time undergraduate students, including living expenses, was $62,990. Over the past two decades, a series of federal laws have steadily expanded the appeal and flexibility of education savings accounts, particularly 529 plans and Coverdell Education Savings Accounts (ESAs). Related: Medicare recipients face a growing problem It began with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which made 529s and Coverdells more attractive by increasing contribution limits and adding flexibility. The Pension Protection Act of 2006 made those changes permanent for 529 plans. For Coverdell ESAs, permanence took longer. The 2010 Tax Relief Act extended the EGTRRA enhancements for two years, and the American Taxpayer Relief Act of 2012 finally made those changes permanent. More recently, the SECURE Act of 2019 expanded what 529 plans can pay for, including apprenticeships and up to $10,000 in student loan repayments. The SECURE 2.0 Act of 2022 added another major benefit: starting in 2024, unused 529 plan assets can be rolled over – withing limits – into a Roth IRA for the plan's beneficiary, offering a new way to repurpose leftover education savings for retirement. And now, the proposed House Ways and Means tax bill introduces some major changes yet again to 529 plans. According to Ben Henry-Moreland, senior financial planning nerd at certain K–12 education costs, such as textbooks, tutoring, and standardized test fees, would be eligible for tax-free 529 distributions if the legislation becomes the law of the land as written. In addition, Henry-Moreland said the plans could be used to cover expenses related to earning and maintaining post-secondary credentials. That would include not only traditional college degrees but also professional certifications, potentially even the Certified Financial Planner (CFP) designation. Thus, the legislation would make 529s a more flexible tool for lifelong learning and career development, not just college savings. Moreland also noted that the proposed legislation addresses longstanding quirks in the health savings account (HSA) rules. For instance, when spouses make catch-up contributions starting at age 55, they're required to each make the catch-up contribution to their own HSA. "The proposed rule would allow both contributions to be made to the same account, as is the case with regular, non-catch-up contributions," Henry-Moreland said. The proposed rule would also ensure that one spouse being covered by a flexible spending account (FSA) at work wouldn't automatically make both spouses ineligible to contribute to an HSA. "Few people even know that this can be a problem, so it's good to see Congress trying to address it," he said. Related: Workers struggle with one big problem when they retire Got questions about retirement? Email The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc.
