- By Grant Easterbrook and Brendan SweetRetirement ExpertsMay 19, 2015
- By Grant Easterbrook and Brendan Sweet
Yesterday, the Supreme Court unanimously ruled in favor of employees in a lawsuit over their 401(k) plan’s fees (Tibble v. Edison International). You’ll want to know about it because the decision will be a wake-up call to employers, forcing them to do a better job so workers with 401(k)s will get a fair deal.
First, a little background. By law, employers must do what’s in the best interest of employees when structuring their retirement plans (the legal term for this is the “fiduciary duty”).
In this case, employees at Edison International (a California utility company) sued the firm, arguing that it failed to meet the legal obligation because its 401(k) offered high-cost shares of funds, instead of lower-cost options. Employees had to invest in so-called retail funds (ones typically sold to the general public), whose expenses are higher than what are called institutional-class funds (ones typically sold to employers and pension funds).
A 2012 study found that over a lifetime, 401(k) fees cost a two-earner family with a median income nearly $155,000.
The 9th Circuit Court of Appeals dismissed the suit, saying the six-year statute of limitations had expired. But the Supreme Court just reversed the decision, essentially saying that employers had a continuing duty to reevaluate the investment options they provide. In his opinion, Justice Stephen Breyer said plan administrators must continue “to monitor trust investments and remove imprudent ones.”
One effect of the ruling is that it’ll now be easier to sue an employer over an expensive 401(k) plan, turning up the legal pressure a notch.
Those expenses matter. A 2012 study by Demos, a New York City-based think tank, found that over a lifetime, 401(k) fees cost a two-earner family with a median income nearly $155,000 — and consume nearly one-third of their investment returns.
Another effect is that employers are now likely to review their plans’ fees more often and negotiate with financial companies to reduce them.
The Wall Street Journal’s Karen Damato and Liz Moyer recommended that employees check to see whether the funds in their 401(k) plans are available in share classes with lower expense ratios (the cost of fees in relation to the share price) and to find out how the fees of the funds in their plan compare with other funds investing similarly. A fund’s prospectus or website can tell you if it has different share classes.
If the court’s ruling helps lower fees and removes retirement plan conflicts of interest, that could mean more of your money going to your retirement nest egg. And that could be huge boost towards solving America’s retirement crisis.
Next Avenue Editors Also Recommend:
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- The 4 Biggest 401(k) Mistakes People Make
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