Some 53 million Americans with retirement funds through their jobs may get new legal protection from high fees.
Supreme Court justices were urged Tuesday to put employers on notice that they have a duty to constantly monitor the mutual funds they offer and to drop those that charge excessive fees. If not, firms could be sued and forced to pay damages to employees and retirees.
Lawyers for the Obama administration told the justices that a federal law that protects pensions and retirement funds requires employers who sponsor these funds to act as "prudent" investors and to act "solely" in the interest of their employees and retirees.
That means not just selecting a strong array of mutual funds for a 401(k) account, but continuing to monitor those funds to find ones with lower costs, they said in a case involving Edison International in Rosemead.
Picking an array of funds at one point in time and then ignoring what happens later isn't good enough, the government said.
It is "an ongoing monitoring duty," said Nicole Saharsky, a Justice Department attorney. "You have a duty to look from time to time" to check the performance and the fees. "You can't just set the funds and hold them and forget about them."
If a mutual fund offers a new, low-cost institutional fund, for example, it would not make sense to keep offering employees a higher-cost retail fund that offers the same investments, government lawyers said.
A lawyer for Edison International, the parent of Southern California Edison, which was sued by several employees and retirees, said it could cause "enormous disruption" if employers were told they had a duty to "scour the market for cheaper investment options."
But the justices were quick to disagree. "Well, you certainly do," said Justice Anthony Kennedy. "That's what a prudent trustee would do."
Chief Justice John Roberts and Justice Elena Kagan said investors in mutual funds get regular notices setting out their fees. It would not be hard for employers to check the fees and switch to other similar funds with lower costs, they said.
Justice Ruth Bader Ginsburg noted that Edison had an investment committee that met quarterly. That would allow for a periodic review of the funds, she said.
The case, Tibble vs. Edison International, could have a broad national effect on companies and employees if, as appeared likely, the high court adopts the government's new "prudent" investor standard.
A lot is at stake. According to the Investment Company Institute, 401(k) plans held $4.4 trillion in retirement assets as of March 2014.
Industry experts said fees paid by investors have declined steadily in recent years because of competition from lower-cost funds. But taking advantage of that competition requires regular monitoring.
Some of the funds offered to Edison employees had fees that were 37% higher than comparable institutional funds, said David C. Frederick, a lawyer for the workers and retirees who brought the case. He argued that employers simply needed to act in the best interest of their employees.
"Look at the expenses and determine if there is a cheaper way to get the same investment for less money," he said. "That's not heavy lifting."
A federal district judge in Los Angeles and the 9th Circuit Court of Appeals had ruled that employees and retirees could sue Edison over high-cost funds, but only if the funds had been added to their plan within the last six years. There is no "continuing violation" if a company maintains older, high-cost funds, the appeals court said.
The justices agreed in October to hear an appeal on behalf of the employees.
Frederick and the Justice Department urged the court to spell out the stricter legal standard for monitoring funds and then send the case back to Los Angeles for a judge to decide whether Edison must compensate employees who were charged excessive fees.