Fri, 5 Jun 2015
Investors stand to benefit from recent 401(k) fee litigation, says Morningstar's Scott Cooley.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Scott Cooley--he is our director of policy research. We'll look at the recent Supreme Court case that found that plan sponsors have a continuing obligation to look at 401(k) fee levels. Scott, thanks for joining me.
Scott Cooley: Thank you.
Glaser: Let's start by taking a look at what this court case actually entailed. What was in front of the court?
Cooley: The case was Tibble v. Edison International. Edison is a 401(k) plan sponsor, so it provides a 401(k) to its employees. It had a number of funds in its 401(k) plan that were retail share classes, even though it qualified for institutional share classes. So, the plaintiffs alleged that the employer had a continuing obligation to monitor the funds and make sure that the employees were benefiting from the lowest-cost share class. Edison's defense was that these funds were picked many years ago and that, essentially, the statute of limitations had expired. The court actually sided with the plaintiffs.
Glaser: Now that they have this decision, what impact is it going to have on plan sponsors? Is this kind of an immediate thing or more of a long-term issue to watch out for?
Cooley: There's been a lot of fee litigation around 401(k) plans, so I think this is just kind of another step in those sorts of cases. So, yes, plan sponsors have to be very vigilant about making sure that employees are benefiting from the lowest-cost share classes. Now, what the long-term implications are, we'll have to see. First of all, the court didn't really decide anything other than that the case could proceed. The gist of it was that it couldn't be knocked down on a technicality. We'll see what the ultimate finding is [as the litigation continues]. I think there could be a few other consequences. For one thing, some plan sponsors might tend to favor lower-cost index funds just to protect themselves from this kind of litigation.
Glaser: [Zooming out] from this case to the 401(k) landscape, do you think this is a step in the right direction to making plan sponsors have more responsibility to think about fee levels?
Cooley: I think it's probably a step in the right direction. We'll have to see exactly how this is implemented. Theoretically, a plan sponsor could shift the employees into all of the lowest-cost share classes and then just make up the difference in fees by assessing a per-participant fee or something like that. So, we need to track this over time and make sure that the employees really are benefiting from the lower costs.
Glaser: Are there any unintended consequences that you could see here other than maybe a new fee stream?
Cooley: Some people have speculated that plan sponsors might be quicker to kick out underperforming active funds. They have this continuing obligation to monitor the funds--not just on the expenses but on the performance side, too--and there are some concerns that, potentially, funds could be kicked out of 401(k) plans for kind of transient reasons because employers want to show that they are being vigilant. That might not be the best long-term solution for investors.
Glaser: But overall, do you think that, generally, this is a win for investors and that this should force maybe some of the higher-cost funds out of these plans?
Cooley: Yes, I think, most likely, it's a win for investors. We know that fees can be very corrosive of long-term returns. So, it seems like if this really does result in lower costs for investors, it's a good thing.
Glaser: Scott, I certainly appreciate your take on this case today.
Cooley: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.