By Brent Kendall
WASHINGTON--The Supreme Court on Tuesday signaled it was likely
to side with 401(k) investors in a case that examines when workers
can sue businesses for offering high-cost mutual-fund options in
retirement plans when cheaper options are available.
The justices, in a case examining the 401(k) offerings by energy
holding company Edison International, suggested a San
Francisco-based federal appeals court was wrong when it held a
legal time limit barred employees from suing over allegedly
higher-cost funds that had been offered as options in the 401(k)
for more than six years.
The Supreme Court's hourlong oral argument largely proceeded on
the assumption the appeals court applied the time limit too
strictly. Justice Samuel Alito said both sides in the case seemed
to agree that such lawsuits are "not categorically barred."
If the court rules for the 401(k) investors, it could open the
door for other lawsuits. More than a dozen companies, including
Boeing Co. and Massachusetts Mutual Life Insurance Co., have faced
similar claims.
The justices appeared to believe the lawsuits would be allowable
in some circumstances because employee benefit managers have an
ongoing duty to ensure that investment options in 401(k) plans are
prudent, no matter how long those options have been offered.
Several justices, however, said the current case might not allow
them to rule on the exact duties a company must meet in overseeing
its 401(k) investment options. "I, for one, am not ready to do
that," Justice Sonia Sotomayor said.
Jonathan Hacker, a lawyer for Edison, said it can't be the case
that companies have to "constantly look and scour the market
for...cheaper investment options," for retirement-plan
participants.
"Well, you certainly do, if that's what a prudent trustee would
do," Justice Anthony Kennedy responded.
Employees filed their lawsuit against Edison in 2007, alleging
the company violated its federal-law duty to administer its
benefits plan prudently. They argued the company breached that duty
by offering higher-cost retail mutual funds when identical
institutional-class funds were available with lower fees.
Some justices questioned why a benefit-plan manager would
continue to offer workers higher-fee funds when the same funds
could be obtained for less.
Mr. Hacker said there were costs associated with switching fund
options and workers could be confused by the changes.
Chief Justice John Roberts said workers wouldn't be opposed to
an employer switching fund offerings if the new option charged
lower fees. "They're not going to, you know, be running out in the
halls screaming that there's confusion about that," he said.
Lawyer David Frederick, representing the Edison workers who
sued, told the Supreme Court that trustees who oversee 401(k) plans
should monitor the performance of investment options on a regular
basis and look at fund options to determine if there's a cheaper
way to get the same investment with lower expenses. "That's not
heavy lifting," he said.
The Obama administration is supporting the investors in the
case. A decision in Tibble v. Edison International is expected
before July.
Write to Brent Kendall at brent.kendall@wsj.com
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