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Chuck Jaffe: What The Supreme Court’s Fixes For Retirement Savings May do to Your 401(k)
After this decision was released, I read two short legal blogs about it, and both of them speculated this could lead to the reassessment of many fund fee charges, possibly including a reduction or elimination of 12b-1 fees. Not sure I followed the "why" of it; it had to do with specific wording in the opinion, which neither blog adumbrated. Could dreams come true? Do you believe in "miracles"? (Keep Hope alive?)
FWIW, my take on the 9th Circuit ruling, the SC ruling (which only had to do with statutes of limitations, i.e. time limits on claims), and on people's wishful thinking.
The 9th circuit ruled that revenue sharing is generally okay (though it is fact-specific, and can vary from case to case). Revenue sharing is where the mutual funds pay the Plan's administrative service provider (bookkeeper), and the service provider in turn reduces the fees it charges to the Plan Sponsor (employer). Basically, employees paying 12b-1 fees to cover some of the plan's administrative costs, so that the employer pays less.
Without going into the subissues or reasoning, I'll just quote from the 9th Circuit opinion: "Today we have held that the [revenue sharing] practice here did not violate the terms of the Edison Plan or violate ERISA § 406(b)(3) [prohibiting kickbacks]."
The 9th circuit also ruled that for the funds that were added (in 2002) to the plan within ERISA's 6 year statute of limitations, using retail class shares was a breach of fiduciary duty. But not for the reason you think. The reason was not that they were more expensive than institutional class shares, but that the employer had not even bothered to check whether there were cheaper shares available.
Quoting again from that ruling:
The trial evidence ... shows that an experienced investor would have reviewed all available share classes and the relative costs of each when selecting a mutual fund. ... [W]e have little difficulty agreeing with thedistrict court that Edison did not exercise the “care, skill,prudence, and diligence under the circumstances” that ERISA demands in the selection of these retail mutual funds.
As to the SC ruling, it was (based on ERISA being modeled after trust law) that the employer/sponsor has an ongoing duty to monitor the plan offerings. So the 6 year statute of limitations runs not from the original selection of a fund, but from the time it should have last taken a look at the plan offerings. Thus the suit could proceed.
But the SC also said that (a) it had no opinion on what constituted that duty to monitor (it could be a lesser duty than in making the original fund selections), and (b) whether the plaintiffs could even argue this (because they had not argued that the defendants breached a duty to monitor distinct from the duty to carefully select the funds).
All the SC did was remand to the 9th Circuit to figure out whether the plantiffs would be permitted (procedurally) to argue for a breach of monitoring duty, and if so, what that duty was and whether the defendant actually breached it.
With respect to what people are reading into this case - the SC gave no particular reason for hope. Any ruling about share classes or share costs was decided in the trial court, affirmed in the circuit court, and not appealed to the SC. There's no open issue here on which to be hoping for anything better than was already decided.
@msf Thanks a bunch. Got it! As someone who once managed a branch office of a not-for-profit law firm for several years, another example that one should always go first to the opinion before proceeding elsewhere, to avoid confusion and the risk of being misled. And so the stake in the heart of Hope will remain, until something else comes along to pull it out. [perhaps "cognitive bias" at play here with my first impression; I so very much loathe 12b-l fees]
Comments
Could dreams come true?
Do you believe in "miracles"?
(Keep Hope alive?)
The 9th circuit ruled that revenue sharing is generally okay (though it is fact-specific, and can vary from case to case). Revenue sharing is where the mutual funds pay the Plan's administrative service provider (bookkeeper), and the service provider in turn reduces the fees it charges to the Plan Sponsor (employer). Basically, employees paying 12b-1 fees to cover some of the plan's administrative costs, so that the employer pays less.
Without going into the subissues or reasoning, I'll just quote from the 9th Circuit opinion: "Today we have held that the [revenue sharing] practice here did not violate the terms of the Edison Plan or violate ERISA § 406(b)(3) [prohibiting kickbacks]."
The 9th circuit also ruled that for the funds that were added (in 2002) to the plan within ERISA's 6 year statute of limitations, using retail class shares was a breach of fiduciary duty. But not for the reason you think. The reason was not that they were more expensive than institutional class shares, but that the employer had not even bothered to check whether there were cheaper shares available.
Quoting again from that ruling: As to the SC ruling, it was (based on ERISA being modeled after trust law) that the employer/sponsor has an ongoing duty to monitor the plan offerings. So the 6 year statute of limitations runs not from the original selection of a fund, but from the time it should have last taken a look at the plan offerings. Thus the suit could proceed.
But the SC also said that (a) it had no opinion on what constituted that duty to monitor (it could be a lesser duty than in making the original fund selections), and (b) whether the plaintiffs could even argue this (because they had not argued that the defendants breached a duty to monitor distinct from the duty to carefully select the funds).
All the SC did was remand to the 9th Circuit to figure out whether the plantiffs would be permitted (procedurally) to argue for a breach of monitoring duty, and if so, what that duty was and whether the defendant actually breached it.
With respect to what people are reading into this case - the SC gave no particular reason for hope. Any ruling about share classes or share costs was decided in the trial court, affirmed in the circuit court, and not appealed to the SC. There's no open issue here on which to be hoping for anything better than was already decided.
And so the stake in the heart of Hope will remain, until something else comes along to pull it out.