It’s hard enough to amass enough money to retire. It’s even harder when the people charged with investing the money in an IRA charge really ridiculous fees, and you can’t trust the trustees to do the right thing.
Check this out. As reported by Floyd Norris of the NYTimes:
If you had a choice between two share classes of the same mutual fund — the only difference being that one class charged higher fees and was therefore guaranteed to have poorer returns — the choice would not seem to be difficult.
But trustees of one corporate 401(k) plan — the type of defined-contribution plan that is increasingly the only kind of retirementplan available to American workers — decided to take the one that charged higher fees.
Now the Supreme Court has agreed to hear a case that hinges on that decision, which was made for employees of Edison International, the parent of Southern California Edison, a utility company. It will hear an appeal of a decision by the United States Court of Appeals for the Ninth Circuit that essentially held that companies were protected from litigation related to investment decisions made more than six years before a suit was filed.
And more:
A third of 1 percent does not sound like a lot, but compounded over 20 or 30 years it can add up. If you invested $1,000 and earned 8 percent a year for 25 years, you would end up with nearly 10 percent more money than if you had invested it at 7.67 percent.
As with most 401(k) plans, employees could choose from a list of funds. Some had lower fees than the funds in question. But they also had different investment objectives.
It costs money to manage a 401(k) fund. Records must be kept for each plan participant, and each participant has the right to move money around, generating record-keeping and transaction expenses.
Edison, like many companies, told workers it would pay those administrative costs. It could have chosen otherwise, but changing such a provision would no doubt anger a lot of workers.
Instead, Edison had a deal to force the workers to pay through the back door. The 12(b)1 fees that were deducted from their investments in the “retail” funds were rebated in a way that allowed Edison to use them to pay the 401(k) costs. The net result was that Edison’s profits were a little higher, and employee investment returns a little lower, than would have been the case if the trustees had chosen the institutional classes of shares.
As Dean Baker points out:
There is a procedural issue which the court must decide about how far back in time plaintiffs can go for bringing a suit. However there is also an important substantive issue. The workers are claiming that the company deliberately chose a higher cost plan, with the fees coming out of workers’ accounts, because the fund manager gave Edison a kickback.
There is a considerable amount of money at stake with this issue. Norris puts the gap in costs at roughly one-third of a percentage point. If this were applied to the more $8 trillion currently held in 401(k) type accounts, it would come to more than $25 billion a year. This is effectively money taken away from workers and given to the financial industry. This is a bit more than 30 percent of what the government is projected to spend on food stamps this year.
