If you’re among the 50 million Americans with a 401(k) retirement account, you probably have no idea how much in fees your friendly mutual fund is taking out of your nest egg. The quarterly statements you get list the “expense ratio,” but it takes serious math skills to figure out exactly how much that totals.
So it’s a relief that in its first ruling on 401(k) fees, the U.S. Supreme Court sided May 18 with employees and retirees. Justices unanimously put the onus on employers to continually monitor the 401(k) plans they provide to make sure participants aren’t being gouged with unnecessarily high fees.
Just like compounded interest, a relatively small difference in fees can add up. For instance, a 1% fee — instead of a far more reasonable 0.25% — would rob $30,000 from a $100,000 account earning a 4% annual return over 20 years.
Consumer advocates say the decision will pressure companies to be more careful with their employees’ money and to offer a wider choice of lower-cost mutual funds. Advocates also hope the ruling pushes mutual funds to lower fees because they will have to be more competitive.
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While some higher-fee funds that are more actively managed can provide higher returns, in general, fees of more than 2% are considered excessive. Fees for popular index funds are lower.
Except for public employees, 401(k) accounts have replaced traditional pensions as a main source of retirement income. With more than 500,000 plans holding about $4.5 trillion — nearly one fifth of all U.S. retirement assets — it’s only proper that they draw more scrutiny from regulators and the courts.
This Supreme Court has not exactly been friendly to workers, so this sweeping ruling should be a loud warning to Wall Street and to big corporations about what’s an acceptable way to do business.
The case involved Edison International, the parent of the mammoth Southern California utility. In a 2007 class action lawsuit brought on behalf of 20,000 employees and retirees, lawyers claimed that that Edison violated its fiduciary duty by choosing more expensive 401(k) plans when virtually identical, but lower-cost, ones were available. More than a dozen corporations, including household names such as Boeing Co. and Lockheed Martin Co., have been hit with similar lawsuits.
In the ruling, Justice Stephen Breyer wrote that companies and trustees in charge of 401(k) plans have an ongoing duty to monitor investments and to “remove imprudent ones.” Before this ruling, companies only had that responsibility for six years after the investment funds were first picked.
If employees and retirees have to make more important investment decisions on their own, it’s only fair that their employers actually give them a choice of reputable funds that offer a decent return.