Supreme Court Increases Employers' Fiduciary Responsibilities in 401(k) Plans

In 2007, a lawsuit was filed against energy giant Edison International, alleging that the company violated the Employees Retirement Income Securities Act of 1974 (ERISA) by offering employees higher-priced retail class mutual funds as retirement plan investments when what were basically the same funds could be had under lower-cost institutional shares. The class action against Edison was brought on behalf of about 20,000 employees and retirees.

The U.S. Supreme Court recently ruled on the case, saying that employers now have a duty to monitor 401(k) plans and protect employees from unnecessarily high administration fees. The unanimous ruling by the high court means that employees can sue employers that fail to monitor mutual funds in 401(k) plans. The decision could also have a significant impact in the financial services industry, which has a large stake in managing the U.S. retirement system.

Essentially, employers now have a greater responsibility to guard 401(k) accounts from seemingly minor fees that can put a huge dent in an employee’s retirement fund over time. The Supreme Court’s ruling applies specifically to employers, but the decision is likely to pressure financial service providers to keep management fees low.

Decades ago, the vast majority of retirement plans were defined benefit plans that provided guaranteed income. These days, most plans are defined contribution plans — 401(k)s or Individual Retirement Accounts (IRAs) — to which the employee, employer or both contribute regularly. Benefits in these plans depend on investment returns, and investment decisions in defined contribution plans have historically been left to employees.

The high court’s ruling requires employers to more closely monitor those plans and help protect employees’ investments.

If you have legal questions about employee benefits, fiduciary compliance or ERISA, then don’t hesitate to speak with an employee benefits attorney. The lawyers of Shepherd, Finkelman, Miller & Shah LLP have handled a number of groundbreaking ERISA cases.