US Supreme Court Rules in Favor of Employees in 401(k) Oversight Case

May 19, 2015

In their unanimous decision Monday, the United States Supreme Court made a clear statement about the duty companies have in monitoring investments offered to its employees. As reported in the Los Angeles Times, the decision involved several employees who sued Edison International alleging that the company had failed in its responsibility by offering high fee ‘retail-class’ mutual funds rather than equivalent, lower fee ‘institutional’ funds.  As a result of the court’s ruling, the case will return to the federals courts in California for reconsideration.

This ruling represents a win for employees, who depend upon their employers to properly execute their fiduciary duty in 401(k) management.   While the difference in fees in this case may seem slight, according to a study last year by the Center for American Progress as reported by the San Diego Union-Tribune, “a difference of just 1 percent a year would erase $70,000 from an average worker’s account over a four-decade career.”

The case was originally filed under the federal Employee Retirement Income Security Act (ERISA), which is designed to protect employees from financial fraud related to pensions and other retirement benefits. The case was dismissed in federal appeals court on the basis that it was filed too late to contest the original choice of funds. However, writing for the high court, Justice Stephen Breyer noted that “The continuing duty to review investments includes a duty to remove imprudent investments.”

Retirement plans and especially 401(k) accounts are increasingly the foundation for retirement living. According to the Investment Company Institute cited by the San Diego Union-Tribune, 53 million people held 401(k)-type plans at the end of last year. These accounts are offered through employers, who have a responsibility to select, review and remove investments in the interests of their employees. The ruling on Monday by the US Supreme Court is a strong reminder to employers of that responsibility.

Read the Los Angeles Times story “Supreme Court: Employers can be sued over high fees in retirement plans”.

Read the San Diego Union-Tribune story “Justices make it easier to sue over 401(k) retirement plans.”

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