The U.S. Supreme Court this week sent a strong message to employers offering 401(k)s: You can’t just pick investments for the plan and then forget about them.
This unanimous decision is expected to provide greater protection for 401(k) participants who increasingly rely on these plans to fund their retirement. And it may also trigger more lawsuits by workers unhappy with their investment options and the fees charged, legal experts say.
“Participants over the long term should benefit from all of this,” says Rick Meigs, president of 401khelpcenter.com. “It will drive plan sponsors or brokers to try to deliver funds that they can legally defend” for being in the plans.
The case, Tibble v. Edison, was originally filed in 2007. Employees of Edison International, a California-based utility, claimed that the company failed in its fiduciary duty to workers when selecting six mutual funds in the 401(k) plan. Funds can have a variety of share classes with different fees. The workers argued Edison breached its duty by choosing more expensive retail-class mutual funds when nearly identical and cheaper institutional-class funds were available.
The issue before the Supreme Court was whether the workers had filed their case in time. Complaints of fiduciary failures must be brought within six years of an alleged breach, and Edison argued that half the funds in question had been in the plan for longer than that.
However, the court said an employer’s duty doesn’t stop once funds are selected. Instead, it must monitor investments and remove those no longer appropriate, the court said. And that six-year filing deadline doesn’t prevent workers from suing an employer over its failure to monitor.
The Tibble case now goes back to a lower court in California. Yet the Supreme Court’s decision is expected to have repercussions for workers, employers and 401(k) providers across the country.
“Thousands of employers who sponsor 401(k)s will need to continually monitor the investments offered to participants,” says Michael Abbott, an employee benefits lawyer in Houston. And all employees will now have “the ability to invest their 401(k) dollars in more up-to-date, prudent and lower-cost offerings.”
AARP filed a friend-of-the-court brief in support of Edison workers.
Mary Ellen Signorille, an AARP senior attorney, says most employers regularly monitor investments, making changes when necessary. The court’s decision is significant because it affirms what they should be doing, she says.
“If the court had gone the other way, it would have basically given the plan a free pass to not do anything,” she says.
The court did not spell out how employers should monitor their 401(k)s. But Justice Stephen Breyer, who wrote the opinion, did drop hints at what would pass muster, says William Birdthistle, a professor at Chicago-Kent College of Law.
Basically, employers will need to drop any retail-class mutual funds from the plan if they’re able to offer cheaper institutional shares, Birdthistle says.
“That growing trend could save investors billions of dollars,” he says.
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