The nation's highest court has handed retirement savers a victory in a case that casts a spotlight on 401(k) fees.
In a recent decision, the
In its opinion, the
While the courts ruled on technical points, 401(k) participants should stay focused on the issues at the heart of the case, says William Birdthistle, law professor at
No matter what the ultimate outcome, the case raises three key questions for plan participants.
Are there retail funds in my 401(k) plan? Enter your 401(k) funds' ticker symbols at Morningstar.com, and click the "purchase" tab to see the funds' other share classes. If the share class in your plan isn't the cheapest available, it's worth asking why the higher-cost share class is on the menu. A 401(k) plan holding millions or billions of dollars should generally have access to cheaper institutional shares.
Lower courts found that Edison did breach its fiduciary duty by including retail share classes in its 401(k) when cheaper institutional share classes were available. But the courts limited that ruling to funds that had been in the plan for less than six years when the participants filed their complaint.
While retail shares can be costly, institutional shares aren't necessarily cheap -- so it's important to size up all of your plan's costs. To see how your 401(k) plan's expenses stack up against others of similar size, search for your company's name at Brightscope.com.
How are my 401(k) plan's administrative expenses paid? Every 401(k) plan has administrative expenses, such as the costs of recordkeeping and accounting. In some cases, they're covered by the employer or charged directly against participants' accounts and clearly listed on participant account statements. But in other cases -- as in the Edison plan's retail funds -- administrative costs are built into the expenses of funds in the plan.
Such revenue-sharing arrangements "can bury expenses, so nobody sees them come out of their account," says
How regularly is my 401(k) plan monitored? Companies sponsoring 401(k) plans must not only select prudent investment options at the outset but also monitor them on an ongoing basis. Participants can get an idea if the 401(k) plan is on autopilot. If your plan has 15 investment options and none of them has changed in the past 10 years, for example, "that may be an indication that there's no good ongoing monitoring," says
Ask your employer whether it has a retirement-plan committee, who is on the committee and what issues they look at as they monitor the plan, Itzoe says.
Simply asking the right questions can prompt companies to make changes. Participants should make sure their employer knows, Meigs says, "that they want good investment options as inexpensively as possible."
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Eleanor Laise is the Associate Editor of Kiplinger's Retirement Report.