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Top court speaks on 401(k) fees

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The U.S. Supreme Court has just increased the fiduciary responsibilities of 401(k) plan administrators.

Alert: In a highly anticipated ruling, the nation’s top court says that employers have an ongoing duty to monitor fees being charged in their plans. The court’s ruling was unanimous. (Tibble v. Edison International, S. Ct. No. 13-550, 5/21/15)

Here’s the whole story: Under the landmark federal law known as ERISA (Em­­ployee Re­­tire­­ment In­­come Security Act), participants in employer-sponsored qualified retirement plans are afforded numerous protections. Notably, ERISA:

  • Requires providing participants with plan information, including important facts about plan features and funding
  • Sets minimum standards for participation, vesting, benefit accrual and funding
  • Establishes fiduciary responsibilities for those who manage and control plan assets
  • Requires plans to establish a claims and appeals process for participants to get benefits from their plans
  • Gives participants the right to sue for benefits and breaches of fiduciary duty.

Nevertheless, plan participants may have little say regarding the investment options they are offered under the plan. For instance, ­employees aren’t able to negotiate fees being charged to administer mutual funds in the plan. These fees are included in the stacks of documents provided to participants.

The issue in the new Supreme Court decision revolved around the management fees for mutual funds being charged to employees at Edison International, a California power company. Typically, the fees for retail mutual funds are higher than the ones charged for institutional funds. For example, the fee for a retail fund might be 1% while an institutional fund may be only .25%. This difference could add up to tens of thousands of dollars over time.

Participants in Edison’s plan were offered investments only in retail mutual funds. So a class action lawsuit was initiated against the firm.  

A California district court sided with the employees but only for the fees charged for three of the funds. For the three other funds, the court ruled that the statute of limitations barred any claims. The 9th Circuit Court of Appeals affirmed.

Now, the U.S. Supreme Court has overturned that decision. It says that the statute of limitations isn’t a bar. The court, in referring back to common law, says that there’s “a continuing duty—separate and apart from the duty to exercise prudence in selecting investments at the outset—to monitor, and remove imprudent, trust investments.” Bottom line: Employers may be sued if they fail to uphold these fiduciary standards.

Tip: Employers should review their procedures in light of this new case.

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