Death Knell for Dominance In 401(k)s, Edelman Says
June 23, 2008
The Supreme Court's recent decision in LaRue v DeWolff to permit workers in 401(k) plans to sue administrators for high fees will inevitably lead to lower fees-and the end of the retail mutual fund industry's dominance of the market. That's the strong opinion of widely quoted, and frequent financial TV guest Ric Edelman.
This past February the Supreme Court ruled in favor of James LaRue, a worker suing the administrators of his 401(k) pension plan on breach of fiduciary duties, Edelman, a financial planner, notes. LaRue claimed that DeWolff, Boberg & Associates, Inc. ignored LaRue's instruction to change to more stable investments, eventually leading to depletion of his pension by approximately $150,000. The Supreme Court ruled that this was a breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA).
Controversy over this case centered on whether LaRue was recovering remedies on an individual basis as the ERISA "provides remedies only for entire plans, not for individuals." In this case, however, the Supreme Court ruled that LaRue was not suing on such matters but rather on a breach of fiduciary duties that impaired the value of his individual assets.
The outcome of this case has caused concern, as many wonder what the long-term implications will be and how they will affect pensions, 401(k)s and the relationships between employees and administrators of mutual funds. Investors pay an average fee of 3% for mutual funds in their 401(k)s. To illustrate the impact these charges have on long-term investments, the U.S. Government Accountability Office reported last year that a 1% increase can lower future account balances by approximately 17%. Certainly, investors are taking note.
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