The U.S. Supreme Court issued a ruling Monday that could make it easier for 401(k) plan participants to sue employers for offering investment options that erode their retirement savings through excessive fees.
The court’s unanimous ruling involved claims by participants in the retirement plan run by the California-based energy company Edison International. The employees argued that the company offered six mutual funds with higher fees than identical institutional funds that were available but not offered to participants in Edison’s retirement plan. By neglecting to offer the lower-cost investment options, the company did not act in workers’ and retirees’ best interests, as required by law, plan participants argued.
“This is a victory for workers and retirees in 401(k) plans because it makes very clear that there is an ongoing duty on the part of fiduciaries to make sure fees are reasonable and investments are prudent,” said Jerome J. Schlichter, a St. Louis lawyer who has brought a series of suits challenging the fees attached to workers’ 401(k) plans.
Even a modest jump in fees can have a significant impact on the amount of money workers can accrue in their retirement accounts during the course of their careers. The Labor Department said that a 1 percentage point change in fees could result in a 28 percent difference in retirement savings for a worker who kept $25,000 in an account earning an average of 7 percent in investment returns annually over 35 years.
The high court’s ruling revived a claim by Edison employees that previously had been dismissed by a federal appeals court. The court had ruled that the employees did not act quickly enough to challenge the investment options offered in Edison’s retirement plan. But the Supreme Court disagreed with that finding, saying that employers have a continuing responsibility to monitor fees.
“The continuing duty to review investments includes a duty to remove imprudent investments,” Justice Stephen G. Breyer, who authored the court’s opinion, said in announcing the decision.
The settlement was the latest in a series of cases that are reshaping the options that companies offer employees for investing the trillions of dollars held in 401(k) retirement accounts. Earlier this year, a federal judge gave preliminary approval to a settlement with participants in Lockheed Martin’s 401(k) plan who sued the defense contractor for allowing excessive fees in their retirement plans.
The Supreme Court’s ruling came as consumer advocates and the Obama administration have brought the previously obscure issue of the cost of investment fees under greater scrutiny. Earlier this year, President Obama endorsed a new regulation that would increase the standards for brokers who recommend investments for retirement accounts.
The Edison case will return to lower courts for further litigation on the scope of the company’s duty to monitor investment options.
The case is Tibble v. Edison International.