Retirement savers may soon get a boost from the U.S. Supreme Court.
On Tuesday, the country’s highest court will hear arguments in a case that revolves around the investment fees paid by 401(k) plan participants.
In the initial class-action lawsuit, Tibble v. Edison, participants in the 401(k) plan sponsored by California-based utility Edison International argued that they were being charged excessive fees.
Under the federal Employee Retirement Income Security Act, companies that sponsor 401(k) plans have a “fiduciary responsibility” to act in the best interest of their employees. The lawsuit claimed that Edison breached this duty in the case of six of its fund options, where almost identical offerings charging lower fees were available.
Studies have shown that even a small difference in 401(k) investment fees can result in the difference of tens of thousands of dollars of savings
Lower courts have already sided with the plan’s participants, ruling that the company didn’t act in their best interest when it chose pricier “retail-class” shares of mutual funds when cheaper “institutional-class” shares were also available.
“Warren Buffett doesn’t pay retail and neither should an employee of a large company 401(k) plan,” said Jerry Schlichter, the attorney representing Glenn Tibble and other participants in the Edison 401(k) plan.
But Edison has argued that under the federal law’s statute of limitations, plan participants can only sue based on funds that have been in the plan six years or less. As a result, it said that it couldn’t be held liable for three of the six funds in question, since they had been in the plan since 1999 and the lawsuit wasn’t filed until 2007.
Both a district court and an appeals court agreed with Edison. The plan participants have since appealed those rulings.
Now, the Supreme Court will consider whether 401(k) plan sponsors have an ongoing duty to monitor the plan’s fund offerings, beyond the six-year statute of limitations.
The case, which is part of a wave of 401(k)-related lawsuits filed against financial firms and other companies that allege mismanagement and inappropriately high fees, is the first to reach the U.S. Supreme Court. A ruling is expected in the next few months.
Groups like the AARP, the Pension Rights Center and the U.S. Solicitor General have urged the court to rule in favor of the Edison 401(k) participants.
They say a plan sponsor’s responsibility to monitor the suitability of investment options is essential to a saver’s retirement security, and should not simply stop after the funds have been in the plan for more than six years.
While the case centers on a technical issue, a decision in favor of the 401(k) participants would reinforce the fact that employers must use their buying power to get the best possible 401(k) deal for their employees, said Fred Reish, an attorney and partner at Drinker Biddle and expert in federal retirement law.
“The case itself is…about the statute of limitations, but it’s going to have a lot of substantive consequences,” he said.