On Monday, the Supreme Court made a narrow ruling on a technical point that may have far-reaching implications.
Participants in the 401k plan offered by Edison International, a California utility, sued the company claiming that it stocked the plan with “retail” versions of investment products that charge higher management fees than the lower-cost “institutional” versions that it could have chosen instead.
The company defended itself by successfully arguing in a lower court that the statute of limitations for bringing such a lawsuit had expired. The Supreme Court said the lower courts were mistaken. An employer has a continuing duty to supervise its 401k offerings. So even though years had passed since the 401k offerings were placed in the plan, the statute of limitations had not expired.
So the case goes back to the lower court, where presumably the question of whether Edison was right to offer a higher cost product than it might otherwise have.
Was this a mistake?
Why wouldn’t any company have the lowest cost share possible in the 401k plan?
The short answer is that the company receives a portion of the management fee in return for allowing the higher charges.
Typically the company argues that the fee-splitting helps cover the costs of administering the 401k plan. In practical terms,thought, the move doesn’t eliminate the costs. It shifts them from the company to the plan participants.
If the Wall Street Journal is correct, this is the case with Edison, which is reported as pointing out that the fee-splitting is disclosed in plan documents.
I have two thoughts:
–the sales pitch from the investment company providing the 401k services probably sounded good at the time. The 401k would be inexpensive (free?) to Edison. High fees would shift the cost onto employees instead–which makes sense, the seller might argue, since employees are the beneficiaries of the plan.
On the other hand, to anyone without a tin ear, this sounds bad. The amounts of money are likely relatively small. Edison is probably spending more on legal bills than it “saved” by choosing the plan structure it did. And if it turns out that Edison is profiting from the arrangement rather than just covering costs, the reputational damage could be very great.
–fee-splitting arrangements on Wall Street are far more common than I think most people realize. This case could have wide ramifications for the investment management industry if the courts ultimately decide that Edison acted improperly.