Supreme Court Hints at New Monitoring Rules for 401(k) Plans

U.S. Supreme Court justices suggested they will require 401(k) plans to periodically monitor the investment options they offer, in a case that may give investors more power to sue over excessive fees.

Hearing arguments Tuesday in Washington, the justices indicated they will revive claims that Edison International’s 401(k) plan should have shifted investors from the retail class shares of three funds into identical institutional class shares that carried lower fees.

Several justices scoffed when Edison’s lawyer argued that a switch of investments might have confused the workers who participate in the plan.

“How was there investor confusion?” Chief Justice John Roberts asked. “It seems to me one sentence saying, ‘Well, we have been paying 0.3 percent, this is 0.2 percent, that’s why we’re changing’ — they’re not going to, you know, running out in the halls screaming that there’s confusion about that.”

The case is at the Supreme Court amid intensified scrutiny of fees in retirement accounts, now the primary savings vehicle for old age. More than a dozen companies, including Lockheed Martin Corp. and ABB Ltd., have been sued since 2006. Lockheed last week settled its case for $62 million. Americans held $6.6 trillion in 401(k)-type plans as of Sept. 30, according to the Investment Company Institute.

A federal appeals court said the Edison workers could sue only over three funds that were added to the plan within the six-year time limit to file a lawsuit. The workers won $371,000 on those funds and say they are entitled to additional damages on funds added earlier.

Little Support

The appeals court’s reasoning drew little support in the hour-long hearing. The justices instead focused on what standards should apply when plans continue to hold old investments.

Edison’s lawyer, Jonathan Hacker, said he agreed with the workers that funds must periodically monitor investments, even those added more than six years earlier. Hacker instead argued that the Edison workers had failed to show that the company’s monitoring was inadequate.

Justice Anthony Kennedy balked when Hacker argued that plan trustees don’t have a legal duty to be on constant lookout for cheaper investments.

“You certainly do if that’s what a prudent trustee would do,” Kennedy said.