The Supreme Court appeared likely Tuesday to make it easier for participants in employee retirement plans to challenge companies' investment decisions that eat into retirement savings.
The justices heard arguments in an appeal filed by current and former employees of energy company Edison International. They object to the way the company manages employees' 401(k) retirement accounts, including choosing mutual funds with excessive fees.
The high court hearing comes amid heightened scrutiny of the management of Americans' retirement investments, including President Barack Obama's call on Monday for tougher standards for brokers who direct individual accounts.
Industry and consumer groups are closely watching the Supreme Court case because 401(k) accounts have grown in popularity and dollar amount, supplanting traditional pension plans. Fifty-three million people hold about $4.5 trillion in 401(k) accounts as of Sept. 30, according to the Investment Company Institute, an industry group.
Edison offers employees roughly 40 mutual funds to choose from in deciding how to invest. The case involves a few funds in which the company chose higher-cost funds open to the general public instead of identical investments with lower costs that are open only to institutional investors. The Edison employees contend that the company did not act in their best interests by choosing the higher-cost funds.
Higher fees of just 1 percent a year would erase $70,000 from an average worker's account over a four-decade career compared with lower-cost options, according to a study last year by the Center for American Progress, a liberal think tank.
The Edison lawsuit is one of several claims being advanced by St. Louis-based lawyer Jerome Schlicter. Last week, Lockheed Martin said it has agreed to pay $62 million to settle another Schlicter-led lawsuit that accused the defense contractor of mismanaging employee retirement accounts and using funds with excessive fees.
The justices themselves recognized the value of the lower-cost investments. "The day when you get from your mutual funds a notice that says, by the way, you're a preferred investor, we're switching you, it's the exact same fund under a different name, now you don't pay fees, that's a red-letter day for an investor," Justice Elena Kagan said.
There was little support evident among the justices for a decision by the federal appeals court in San Francisco that dismissed the Edison employees' claims under the federal Employee Retirement Income Security Act, known as ERISA. The appeals court said the lawsuit was filed too late to contest the original choice of funds and said the executives who make those decisions only have to reconsider them if circumstances change dramatically.
Jonathan Hacker, representing Edison, said it would be too much to ask the executives periodically to "scour the market for...cheaper investment options."
But Justice Anthony Kennedy was unmoved. "Well, you certainly do, if that's what a prudent trustee would do."
A decision in Tibble v. Edison International, 13-550, is expected by late June.