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Top Court Mandates 401(k) Fee Duty

Are you being charged more than you should be for management fees in your 401(k) account?  The U.S. Supreme Court thinks you might be. In a landmark ruling, the nation’s top court says employers have a continuing duty to monitor the fees paid by participants in 401(k) plans (Tibble v. Edison International, S. Ct. No. 13-550, 5/21/15).  And whereas the court often is divided along political lines, in this instance it came to a unanimous conclusion.

The ruling relates to the obligations of employers under the Employee Retirement Income Security Act (ERISA).  ERISA provides numerous protections to 401(k) plan participants, and it requires employers to meet fiduciary standards, putting the interests of plan participants ahead of their own.  Now the Supreme Court has extended those duties in one key respect.

For employees, 401(k) plans have long come with significant drawbacks, including an inability to negotiate lower fees affecting their account assets.  And while ERISA and other laws ensure that workers are informed about fees and other rules relating to the operation and administration of their plans, such notifications may be buried deep in a stack of documents that participants don’t have the time or inclination to wade through.  And so employees usually just accept the status quo.

Some workers at Edison International, a California-based electric power company, decided to do something about this situation.  They brought a class-action lawsuit alleging that they were being charged unnecessarily higher fees in their 401(k) accounts.  These employees had to choose exclusively from several retail mutual funds in their 401(k) plans, rather than being able to opt for institutional mutual funds.  Typically, retail funds carry higher management fees than institutional funds.

For example, a retail fund might charge a 1% fee on assets compared with just 0.25% for an institutional fund. Although this may seem like small potatoes now, it can add up over time, costing participants tens of thousands of dollars, especially if they are years away from retirement.

A lower court had sided with the plaintiffs, with some exceptions, and the Supreme Court upheld the obligations for all claims made by the employees.  As a result, employers now may be sued if they fail to continue to monitor mutual funds in 401(k) accounts to look for unnecessarily high fees.

The case will affect employers and employees alike.  Employers may have to modify procedures for administering plans while employees are likely to have broader investment options.  Remember, though, that as important as mutual fund fees are, they’re not the only consideration when choosing an investment option.

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