Business People Columns Discussion

This historic case made it clear retirement plan trustees have an ongoing obligation to monitor investments – particularly how much they cost.

Employer strategies

Supreme Court Rules Against 401(k) Plan Trustees for Excessive Fees

  • John Stiglich
  • 5/27/2015

In the first U.S. Supreme Court case to consider fees in 401(k) plans, justices reached a unanimous verdict in favor of plan participants. This historic decision may influence benefit plan fiduciaries as well as several similar high-profile lawsuits pending right now. These suits claim that companies did not lawfully manage their participant-directed individual account plans (e.g., 401(k) and 403(b)). They allege the organizations (as plan sponsors and trustees) failed to act in the best interest of their employees by:

  • Using high-cost retail mutual funds over lower-cost options
  • Allowing excessive recordkeeping fees being charged to the plans instead of the plan sponsor
  • Agreeing to use only proprietary investment options from the recordkeeper (which in turn reduced other fees paid by the employer)
  • Funneling employees’ savings into investment products managed by affiliated companies

First U.S. Supreme Court case to consider 401(k) fees

Tibble v. Edison International was originally filed in California in 2007. In the suit, the plaintiffs (all participants in the Edison International 401(k) plan) alleged that in 1999, the plan trustees acted imprudently when they selected three “retail share class” mutual funds for the retirement plan when identical funds were available in a lower-cost share class. As a result, the plan participants were paying “excessive fees” and their investment returns were lower. Plan participants sued the plan fiduciaries for making an imprudent decision under the Employee Retirement Income Security Act (ERISA) and offering higher cost investments.

Both the District Court and the Ninth Circuit Court of Appeals found in favor of the plan fiduciaries under the premise that the statute of limitations for filing the suit had passed. Lawsuits under ERISA are required to be filed within six years from the date of the act that led to the claim. The U.S. Supreme Court found that the fiduciary rules under ERISA arose from common-law trust principals and under that basis the plan fiduciaries have an ongoing obligation to monitor investments and remove the imprudent ones. The U.S. Supreme Court remanded the case back to the 9th Circuit Court of Appeals requesting that they determine whether the plan trustees breached their fiduciary duties.

Monitoring plan investments

This case may result in new lawsuits against plan fiduciaries if they have failed to monitor plan investments after they were selected for the plan. The U.S. Supreme Court has made it clear that the fee disclosure regulations issued by the Department of Labor (DOL) in 2012 should be followed and retirement plan trustees have an ongoing obligation to monitor investments — particularly how much they cost.

How we can help

Download a sample of our complimentary Retirement Plan Diagnostic Report, which is designed to address your fiduciary responsibilities and give you a benchmark for how your fees stack up to other plans. Retirement Plan Diagnostic Report

Get practical suggestions on managing your retirement plan in a compliant manner and learn more about these lawsuits and the fee disclosure regulations by reading our article titled “401(k) Plan Lawsuits Focus on Reasonable Fees and Trustee Responsibilities” or downloading slides from our May 19, 2015, webinar.

CliftonLarsonAllen (CLA) also offers three complimentary tools to help you comply with the retirement plan fee disclosure rules and examine the effectiveness of your plan. Our Plan Check-Up looks at the current plan design to see if it is accomplishing your goals. The Retirement Plan Diagnostic Report addresses your fiduciary responsibilities and gives you a benchmark for how your fees stack up to other plans. If your fees look high, we can run a Retirement Plan Efficiency Analysis (RPEA) to illustrate how an alternate recordkeeping and investment platform could reduce fees while maintaining or improving the plan’s benefits and features.

  • John Stiglich
  • Principal
  • CliftonLarsonAllen Wealth Advisors, LLC