U.S. Supreme Court to decide if workers can sue over 401(k) fees

Most of us have a 401(k) plan, but how many of us know if it’s being managed properly? That is what the US Supreme Court will be deciding, whether or not to give 401(k) participants more power to sue their plans for investments that have excessive fees.

According to a Bloomberg article,

The appeal, filed by Edison International workers, contends that participants should be able to sue plans for retaining imprudent investments. A federal appeals court said a federal statute of limitations bars suits over investments added to a plan more than six years earlier.

 So why is this a big deal? In March 2014, 401(k) plans in America held an estimated $4.3 trillion in assets. If we take all U.S. retirement assets, including employer-sponsored plans of defined benefit and defined contribution, IRAs, and annuities, 401(k) plans make up about 19 percent of the country’s total retirement assets of $23 trillion. Compare that to ten years ago when 401(k) assets were $2.2 trillion and represented 16 percent of the overall U.S. retirement market.

The typical investment vehicles in 401(k) plans are mutual funds. When you purchase a mutual fund, the shares included in the fund can be high cost or low cost depending on a variety of factors. The lawsuit before the US Supreme Court is focused on six mutual funds that were added to the Edison plan in 1999.

The workers say the plan improperly bought retail class shares, rather than identical institutional class shares that carried lower fees. Some of the fees on the retail shares were then returned to Edison’s service provider, ultimately reducing the company’s administrative costs by $8 million, according to the workers.

Two lower courts said the workers could sue only over the three funds that were added to the plan within the six-year statute of limitations. The workers won $371,000 on those funds and say they are entitled to additional damages on the rest.

The justices are scheduled to hear arguments early next year and are expected to have their ruling by the end of their nine-month term in late June 2015.

Sarah Curry

Sarah Curry is Director of Fiscal Policy Studies at the John Locke Foundation.