SCOTUS, Fidelity lawsuits highlight paying lower fees on 401(k) funds
Monday Money Tip: Lawsuits point up need to look at 401(k) fees
ERIN E. ARVEDLUND, INQUIRER STAFF WRITER
POSTED: Monday, December 1, 2014
As a 401(k) investor, are you paying the lowest fees on mutual funds offered by your company?
Two lawsuits highlighted by Brian Menickella show how fees are coming under scrutiny. Menickella, cofounder and managing partner of the Beacon Group of Companies in King of Prussia, advises on retirement-fee structures and benefits.
Some workers are winning the battle to lower costs in retirement plans.
Last summer, Fidelity Investments, Boston’s mutual-fund giant, settled a class-action lawsuit, led by former employee Lori Bilewicz, alleging that the firm larded the company 401(k) plan with higher-fee, in-house mutual funds.
In settlement documents approved by a judge in October, the court found that Fidelity acted in its own self-interest, instead of looking out for 401(k) investors, by including in its investment plan a disproportionate number of Fidelity mutual funds. (Read more at http://fidelity401klawsuit.com/bilewiczlawsuit.mx.)
In a statement Friday, Adam Banker, a spokesman for Fidelity Investments, said that although the firm believes the lawsuit was “entirely without merit,” it determined that settling “was in the best interest of our employees and our business.”
In February, Menickella says, the U.S. Supreme Court will hear a case that might have profound consequences for 50 million Americans whose retirement includes 401(k) plans.
Glenn Tibble and other employees of utility operator Edison International argued that their $3.8 billion retirement fund was managed imprudently.
Instead of cheaper “institutional” mutual funds, the Edison 401(k) Savings Plan offered its 20,000 employees “retail” mutual funds. whose higher costs range from 0.24 percent to 0.40 percent of their asset balance annually. Funds included were the William Blair Small Cap Growth Fund, the PIMCO (Allianz) RCM Global Technology Fund, and the MFS Total Return Fund.
Why do this? The practice is known as “revenue sharing,” in which certain mutual funds collect fees out of fund assets and disburse them to the 401(k) plan’s service provider.
“Revenue sharing, a practice at the center of the Edison case, is a deliberate overcharge at the fund level,” Menickella says. That means 401(k) participants pay an overcharge to hide compensation for vendors and middlemen.
Nobody suggests that revenue sharing is illegal. “This case is, rather, about an employer being legally responsible for knowing the fee structure of a plan and determining if it is reasonable,” he adds.
Stay tuned for the U.S. Supreme Court hearing on this case.