Personal Finance

Supreme Court may give retirement savers a boost

Obama's new rules for brokers & retirement accounts

Does your 401(k) plan really offer the best investment choices for you? And is your employer reviewing those choices often enough?

Those questions are at the heart of a dispute that has made its way to the Supreme Court, which is hearing the arguments Tuesday. If the justices rule in favor of the plaintiffs, the case, Tibble v. Edison International, could have major implications for how companies run 401(k) plans.

The original suit claimed that Edison, the Rosemead, California–based utility, failed to fulfill its fiduciary responsibility to employees participating in its 401(k) plan because it offered several funds among the plan's investment offerings that had higher fees than other nearly identical funds.

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Edison claimed, though, that according to terms of the Employee Retirement Income Security Act, or ERISA, which governs how 401(k) plans are run, the plaintiffs could only sue over funds that were among the offerings during the previous six years or less–and that several of the funds in question had been included for longer.

But the plaintiffs argued that fiduciary responsibility for plan choices is ongoing, and it is that question that the court agreed to hear.

"The question is what are the time periods in which these selections are made, and what are the statute of limitations" boundaries, said Howard Shapiro, a partner at Proskauer and an expert on ERISA litigation. He cautioned that the Supreme Court could opt to issue a ruling on broader grounds. But even if the court does not, the result could well be an increase in lawsuits related to retirement plan choices.

"It could extend the time periods of liability for decisions that were made so that the plaintiffs would be able to go further back into the past to attack decisions," he said.

The case is being argued at a time when a number of other employers and plan providers have been sued over their management of defined contribution plans. In December, Nationwide Life Insurance and its affiliate, Nationwide Financial Services, settled for $140 million a lawsuit that claimed that the revenue-sharing payments Nationwide received from several mutual fund companies violated ERISA.

A month earlier, in November, MassMutual agreed to pay $9.475 million to retirement plan participants to settle a suit that claimed it breached its fiduciary responsibility when it got revenue-sharing payments from investment advisors and mutual fund companies.

Also in December, Lockheed Martin settled for $62 million a class action claiming that the company offered investment options in its retirement plan that had excessive fees. Nationwide, MassMutual and Lockheed Martin deny any wrongdoing.

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"It is natural that as these plans become more omnipresent in the retirement community, the way that they are operated is going to attract more scrutiny from government regulators and from litigators," Shapiro said. "You are going to see more and different types of challenges to 401(k) plans."

Heightened scrutiny of retirement advice is also coming from another quarter: On Monday the Obama administration endorsed a rule proposed by the Labor Department to hold brokers to the fiduciary standard, instead of just requiring them to find "suitable" investments for retirement accounts.

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With 401(k) accounts now dominating the retirement landscape, holding $4.5 trillion in assets, experts say legal and regulatory attention to these retirement accounts will only increase.

"All of these lawsuits have awakened the plan sponsors to the fact that they are under a lot of scrutiny," said Jay Sushelsky, senior attorney for AARP Foundation Litigation. (AARP filed a friend of the court brief in support of the class.) "That's a good thing."