How The Supreme Court Could Stop the 401(k) Rip-off

This fee-sharing arrangement permitted Edison to lower its administration costs by $8 million. Although this must have been good news for Edison, the participants were not so fortunate. They were the ones subsidizing the reduction in administration costs by paying the higher cost of the retail mutual fund investments. I doubt many were aware of this fact. 

The trial court found that Edison breached its fiduciary duty by selecting retail instead of institutional shares of those mutual funds that were first included in the plan within six years before the lawsuit was filed. However, the court threw out identical claims against Edison for selecting retail funds included in the plan more than six years before the action was filed, finding those claims to be time-barred. The trial court was not persuaded by the fact that the high-priced retail mutual funds remained in the plan year after year, even though they were initially selected more than six years before the claim was filed.

The decision of the trial court was subsequently affirmed by the 9th Circuit Court of Appeals. The Supreme Court has an opportunity to change this pro-corporation and anti-investor holding. It is Finance 101 to always use institutional share classes when they are available. It's hardly a high burden on plan sponsors to ask them to continually review investment options in the plan in order to ensure participants are being offered the lowest-fee share classes available. It makes absolutely no sense to immunize plan sponsors from this modest duty.

DYI Comments:  This is the old battle between pro labor and pro business as to who is going to pay the cost of administrating the 401k pension.  Corporate America by its very nature is in business to maximize sales and minimize costs (in this case $8 million).

I've argued that the U.S. is in the turning phase from pro business to pro labor with most rulings or legislation moving in favor of labor.  It will be interesting which way the Supreme Court will rule.  My advice to those with 401k's if your plan expense ratio is greater than 1.0% take the match put the remaining amount into an IRA with Vanguard using their very low cost funds.

DYI