Just Plain Talk: March 1

Previously, I wrote about how Congress was finally getting around to one of the more pressing issues facing our country. No it was not Roger Clemens and the abscess on his buttocks. To bring you up to date Congressional hearings have been held on the unreasonable fees being charged on 401K plans.

Earlier this month Northrop Grumman - a defense contractor with extensive ties to Northwest Florida - was served with a class action lawsuit for allegedly charging unreasonable fees and expenses to participants in the Northrop Grumman 401K plan. The suit also claims the fees did not benefit the workers. This lawsuit was filed on behalf of over 2,000 current employees and hundreds of former employees who worked at the Airborne Early Warning and Electronic Warfare Systems in Bethpage New York or with Northrop Grumman Corp in Long Island New York. The suit alleges the Northrop Grumman breached its fiduciary duty by failing to ensure their 401K plan operates with appropriate expenses.

Several of our clients are former or current Northrop Grumman employees so I am very familiar with how the NG 401K plan is structured. The investment options available for participants appear to be index funds. In fact their fund's performance is compared with specific broad markets indexes. This lawsuit is alleging that the investment options are shadow index funds with dramatically higher annual costs. Costs, by the way, that were not disclosed up-front to the participants.

I don't know about y'all but where I was raised if someone came to your house and took something without telling you we called them a thief. Perhaps that's much too harsh a word for the 401K plan industry but then again maybe not.

The 401K industry is simply not forthright with the fees levied against plans.

The scenario is not unlike a South Georgia reprobate named Gene who built peanut drying trailers He sold one to a farmer then stole it from him and tried to sell to someone else. Gene's defense was that he was "jes borrowin' it."

Moving back to Northwest Florida current and former local NG employees can request a free evaluation of their case at https://www.lawyersandsettlements.com/submit_form.html?label=northropgruman401k

The excessive costs for NG plan participants are difficult to quantify. A rough number is $2000 - $3000 annually per $100,000 in your account. Current employees are limited in alternatives. A Roth IRA is an option but there are Adjusted Gross Income limitations. Saving in a taxable account is an option, too.

Former employees may be tempted to roll the balance to an IRA but that option carries a risk. Most NG 401K plans have company stock. Company stock held inside a 401K plan is eligible for long term capital gains treatment via Net Unrealized Appreciation. However if you roll the 401K balance into IRA you lose the NUA option. Don't do an IRA rollover or make any changes to your 401K plans without speaking with investment or tax professional.

Frequent trading (once a month for instance) is not a sound investment practice. Markets often have dramatic moves - in the business we call it volatility. Stock mutual funds are risky (more volatile) that's why stocks have a greater return than CDs or bond mutual funds (less risky). It is essential that your 401K investment be suitable for your ability to handle risk.

The long-term trend of the stock market is up and the long-term trend for your portfolio should be positive. The converse is true for 401K plan fees where the long-term trend is negative for your portfolio.

But no one worries about the fees being charged and that's way more dangerous than the market fluctuating.

Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Listen to his radio program, Money and Music, every Wednesday at 7 a.m. on 107.1FM, 30A Radio or www.30Aradio.org. Contact him directly at (850) 267-1068 or at LivingstonFinancial.net.