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Tuesday, May 19, 2015

The Supremes Provide More Fuel For a 401k Funds Shift

News summary by MFWire's editors

The justices have spoken; expect more 401(k) plan sponsors and advisors to continue to favor institutional shares of mutual funds.

Yesterday the U.S. Supreme Court issued a unanimous ruling, penned by Justice Stephen Breyer, in the 401(k) fee lawsuit of Tibble v. Edison. The ruling seems to reinforce larger 401(k) plans' shift away from retail mutual funds to institutional mutual funds, separate accounts, and other non-retail investment products.

The case revolves around Edison International's use of retail mutual funds in its 401(k)s when institutional shares were available. Lower courts ruled against Edison for funds that were added to the plan recently (less than six years before the lawsuit was filed) and tossed the claims related to funds that were added more than six years before the suit. Breyer's opinion today sends the case back to a lower court (the U.S. Court of Appeals for the Ninth Circuit) and upholds the ongoing nature of an employer's fiduciary duty to monitor plan investments, dismissing the idea that the statue of limitations for such a claim looks back only to the date an investment was added to the plan.

Another interesting tidbit: the stereotype is that the Ninth Circuit is far to the left, protecting people from power, while the current Supreme Court protects power from the people. Both sides defied their respective stereotypes in this case, suggesting that ERISA and trust law is so obscure that law, and not politics, is driving the rulings. One might wonder what the judges of the Ninth Circuit were smoking when they interpreted ERISA and trust law to mean that fiduciary decisions are fire and forget, once and done ... except it's California, so one can guess what they were smoking, with the proper prescriptions of course.

On the flip side, imagine if the Supremes had sided with the Ninth Circuit. That might mean 401(k) plan sponsors could get a free pass, lawsuit-speaking, on plan features and investment options that had been in the plan for at least six years. Wouldn't a wise 401(k) plan consultant or advisor tell their plan sponsor clients to never change anything about their plan design or investment menu? In that hypothetical situation, defined contribution investment-only (DC I-O) would be a painful asset management channel, because any time a plan sponsor changed investments they would suddenly be opening themselves up to scrutiny again, where they had been immune before. So perhaps fundsters should be grateful that the justices ruled the way they did.

Here's how other publications are framing the ruling:

"Justices Make It Easier to Sue Over 401(k) Retirement Plans", the Associated Press;

"401(k) Plans Must Monitor Investments, U.S. High Court Rules", Bloomberg;

"Supreme Court Hits Pension Plans Over High-Cost Mutual Funds", Forbes;

"Supreme Court hands down decision in key 401(k) lawsuit", InvestmentNews;

"Court Case Raises 401(k) Cost Issues", Kiplinger;

"Supreme Court: Employers can be sued over high fees in retirement plans", the LA Times;

"Supreme Court rules against Edison in 401(k) fiduciary breach case", Pensions & Investments;

"U.S. top court hands win to employees in Edison International 401(k) dispute", Reuters;

"Supreme Court decision should help lower 401(k) fees", the San Francisco Chronicle;

"Supreme Court rules for Schlichter client in 401(k) case", the St. Louis Business Journal;

"Court makes it easier to sue over 401(k) retirement plans", USA Today;

"Does Your 401(k) Use High-Cost Funds?", the Wall Street Journal;

"High Court Ruling Adds Protections for Investors in 401(k) Plans", the Wall Street Journal; and

"High court rules employers have ongoing duty to monitor 401(k) fees", the Washington Post

Edited by: Neil Anderson, Managing Editor

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