Sometimes, you just have to love attorneys. I know, I know. As a profession, they are frequently maligned --- plus there are all those lawyer jokes. However, the lawsuit that a plaintiff’s attorney launched is now on its way to the U.S. Supreme Court and has caught my attention. The issue involves alleged excessive fees charged to retirement plan participants who work for Southern California Edison. The law firm who filed the suit has a track record of winning settlements in favor of participants from a wide range of Fortune 500 companies who had gouged their employees.
While the U. S. Department of Labor has the motto, “Protecting the Rights of American Workers,” they have been especially lax in introducing what could have been legislation or regulations to prevent the loss routinely caused over the past thirty years by excessive retirement plan fees paid to financial institutions. Remembering that average stock market returns were as high as 15 percent for many years during the 80’s and ‘90’s, a drag on those earnings attributable to fees could easily have reduced today’s account balance by one third of what it otherwise could have been. In finance, this is known as the “opportunity cost” --- the cost of a lost opportunity.
The steady flow of money into the mutual funds, thanks to 401(k) plans beginning in 1980, contributed to the fund industry’s status as the world’s most profitable industry. So, with all that money sloshing around, fund companies were quick to think of ways to make their retirement packages more attractive to companies compelled to sponsor these popular plans for their employees. Chief among those “carrots” was the concept of having participants pay for the cost of administering the plan and paying for the “advisory” fees which were disguised marketing costs. The fallacy of the so-called “free” 401(k) plan was a big selling point with companies at all size levels.
Participants never knew the difference because they never saw a bill or had to write a check. Yet, they were paying with the most expensive money anyone could ever use to pay a bill --- money that could have been compounding back then at 15 percent per year for over fifteen years. Money at that compound rate doubles every five years, so $1,000 in fees represents an $8,000 loss in fifteen years. ($1,000 to $2,000 to $4,000 to $8,000 etc.)
Back in the late ‘90’s, I wrote articles and editorials for the Wall Street Journal, New York Times and MONEY magazine which called attention to the pernicious impact of these fees, and while hearings took place in Washington, not a whole lot came of it. George Miller set a different tone, however, when his Committee on Education and Labor enacted laws that required public disclosure of these costs. Unfortunately, even that hasn't stopped the practice. What does seem to work is a law firm acting as what one judge termed “a private attorney general.”
The lawsuit that will go before the Supreme Court, filed by the Department of Justice in behalf of the Labor Department, centers around the fact that trustees are obligated, as fiduciaries, to not charge employees any more than they have to for investment services. Many funds have so-called institutional share classes which charge less than the same funds sold to the public. Selling the so-called “retail” fund class allows the fund company to make more money at the expense of the plan participants.
What brings the issue before the Supreme Court has to do with the six-year statute of limitations. The plan sponsor is saying that they made the decision to buy the expensive funds over six years ago, so they can’t be held liable for costs up until they recently moved to the cheaper funds. The Labor Department will be arguing that as long as they let the expensive funds persist, it is only when they changed them for the better that the clock started ticking on the six-year statute of limitations.
How many angels can dance on the head of a pin? Who cares at this point? What’s important is that the publicity and the threat of lawsuits have finally succeeded in constructive changes at the expense of the fund industry and their clients who acted on bad, self-serving advice. Meanwhile, take a look at your own retirement plan statement and ask for something better if you’re paying more than a half a percent of your account balance in fees per year.