The U.S. Supreme Court decided on Monday that employers have a responsibility to oversee 401(k) plans to protect against high management fees or other issues that could can hurt retirement savings.
The court ruled unanimously on Monday that employers can be sued if they do not undertake their “continuing duty to monitor” 401(k) accounts for unfair or too high fees. Legal experts note this decision could throw a money wrench in the $5.8-trillion retirement fund administration market.
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Ramifications of Supreme Court decision to monitor 401(k) plans
The Tibble vs Edison International surprised legal analysts both for its broadness and the unanimity of the court. Of note, the ruling transfers the burden in legal disputes over retirement plans from workers to employers.
Employee advocates note that many employees have had to deal with 401(k) plans that limit investment choices and provide no method to move retirement plans or lower fees. In most cases, workers are left to their own devices, both in funding and keeping an eye on their retirement plans.
Management fees might seem small, only one or two percent of total assets, but they add up in a big way over time.
For example, a 1% fee on a $100,000 portfolio, for instance, would cost a retirement account $30,000 more than a fee of 0.25% over 20 years, assuming an annual 4% rate of return, based on information from the SEC.
That means, an employee with the lower-cost fund would have $30,000 more for retirement (assuming the same rate of return for both funds). Of note, the larger the retirement account, the more money you lose with higher fees.
Shift in public policy
Wednesday’s Supreme Court decision is the second major setback this year for Wall Street and the rest of the financial services industry. Sector analysts note though this decision is focused on employers, the retirement fund administration industry as a whole will be pushed to lower fees.
The U.S. Department of Labor also formally proposed a new rule that would legally require investment advisers to put clients’ interests first in nearly all retirement-related activities. The controversial rule has major implications for the $6.5-trillion IRA market, which are legally different in that the personal retirement accounts don’t involve employers.
Teresa Ghilarducci, a labor economist and retirement scholar at the New School in NYC, pointed out that the Labor Department proposal currently in the public comment phase, and today’s Supreme Court decision taken together reflect a sea change in the national retirement policy discussion.