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U.S. Supreme Court Highlights the Need to Review 401(k) Plan Fees
Earlier today, the U.S. Supreme Court issued a unanimous ruling that highlights the need to review 401(k) plan fees. The case is Tibble v. Edison and it reinforces the fact that employers need to understand 401(k) plan fees, minimize 401(k) plan fees and monitor 401(k) plan investments.
The Tibble v. Edison Case. Tibble v. Edison involved a lawsuit filed by employees and participants in the Edison 401(k) Savings Plan. Like most 401(k) plans, the Edison Plan allowed the employees to invest their 401(k) account in a number of different mutual funds. The employees argued that Edison could have found lower-priced mutual funds which would have provided a greater retirement benefit to the employees. Edison argued that the employees waited too long to bring their lawsuit because some of the mutual funds were originally added to the Plan in 1999 and the lawsuit was not filed until 2007. In reversing the Court of Appeals decision and allowing the employees to continue their lawsuit, the U.S. Supreme Court confirmed that plan fiduciaries have a duty to examine 401(k) fees when an investment is added to the plan and to monitor the fees for those investments on a going-forward basis.
Assets at Stake. Almost every mid-sized and large employer sponsors a 401(k) plan for its employees. Indeed, 401(k) plans now hold and invest approximately $4.5 trillion dollars for roughly 53,000,000 employees. According to one recent study by the Center for American Progress, an extra 1% in annual investment fees could erase nearly $70,000 from an average worker’s 401(k) account balance over a 40-year career. As more Americans retire and need to rely upon their 401(k) plan investments, many of them are finding that they have less money set aside than they would prefer. It should come as no surprise that there has been a dramatic increase in the number of 401(k) fee lawsuits, particularly class-action lawsuits, filed against employers in recent years. The Tibble v. Edison decision will almost certainly cause this trend to accelerate.
Fiduciary Duties. Even though most employers hire professional advisors and record keepers, the employer itself is almost always named as the “Plan Administrator” under the plan. In most cases, this means that the employer is ultimately responsible for deciding what investment options it wants to provide within that 401(k) plan. The employer makes this decision as a fiduciary responsible for the best interests of the employees and plan participants. Under federal law, the employer is required to make these decisions as a prudent expert or someone familiar with the various fees and charges.
Recommended Employer Actions. We strongly recommend that every employer:
- Review its 401(k) plan documents and policies to determine who is ultimately responsible for 401(k) investments;
- Hire an independent third-party who understands the various fees and practices to help the employer sort through the investment information;
- Have a formal process that it uses to select 401(k) plan investments; and
- Review its 401(k) investments several times per year to confirm whether it should change the 401(k) plan investments.
The most troublesome 401(k) fee lawsuits have involved situations where the employer failed to understand its obligations or document its decisions. Employers will be most successful in defending against a 401(k) fee lawsuit if they have and follow a formal policy or practice to evaluate and routinely review 401(k) plan investments.