401k Fees at Supreme Court

Somehow I missed this until today. The Supreme Court is hearing arguments regarding a new(ish) law about 401k plans. Under something called the Employee Retirement Income Security Act (one of the few legislative acts of recent years that doesn’t have a snappy acronym), a company that has a 401k plan has a fiduciary responsibility to employees in the plan. This means that the company must act in the best interest of the employees. As you can imagine, in U.S. courts this gets pretty nebulous, but it does set a standard.

Supreme Court 401k Case

In this particular case, the company, Edison International, has a 401k plan with six mutual funds that charge higher fees than identical options. In other words, the plan administrator, through incompetence, or for other reasons chose the more expensive options for the plan.

supreme court 401k caseUnfortunately, this is very common. Usually, this isn’t the company, or the HR person, deliberately trying to screw over the employees. Instead, what happens is a 401k company comes in and offers up some proposals. It will say something like, you can have a plan with these investments and it will cost this much, or you can have these other mutual fund investments and it will cost this much. The investment options chosen determine the profit of the provider. Only the biggest and most sophisticated employers ever get to setup a plan from scratch and choose fund by fund. In fact, in anything but big employers, the person running the 401k has another “real” job and the 401k is usually something they do on the side. It’s no wonder that many plans have high fees and expenses.

Ironically, the issue the Supreme Court is hearing has nothing to do with the actual investments. Instead, the law has a statue of limitations of six years. The company argues that since these funds have been in the plan longer than six years that they can’t sue over them. The other side argues that since the funds are still in the plan, they don’t count as six years old. So, the Justices will actually be deciding a technicality.

Lower 401k Fees Help Employees

The good news is that no matter what gets decided, lawsuits like this are already moving the bar. Companies will soon demand that the plan providers either certify that they are offering the lowest costs, or even that they indemnify the company if these pre-packaged plans end up being challenged. That means, that 401k providers will just flat out have to offer better plans with better fees.

All of this is good news for 401k plan participants because the expenses in these plans can be absurdly high, especially for smaller employers who can’t get as good of deal on a plan as larger employers can. Reviewing these expenses is a key factor in deciding whether or not you should roll over your 401k plan to a rollover IRA or leave it with your old employer.

Either way, more scrutiny on 401k plan fees, mutual fund fees, and investing fees in general is a good thing for investors all around.

 

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