The country’s top universities have been hit with an onslaught of lawsuits the last 30 days over excessive fees related to the schools’ 401(k) plans.
At the heart of the trend is an interesting disparity, writes Stephen Mihm for Bloomberg:
On one hand, 401(k)s and their ilk would seem to shift the burden of making investment decisions onto employees, limiting the fiduciary duty of the employer. On the other, the regulatory apparatus that applies to 401(k)s derives from ERISA, whose ideas of trusts and equity law imposes some serious duties for sponsors of defined-contribution plans — ideas at odds with the notion that individuals have to take responsibility for their investment decisions.
This disparity informs the lawsuits over excessive fees. Schlichter is pushing courts to recognize that 401(k) and 403(b) sponsors are trustees with grave responsibilities toward their plan participants. Implicit in this line of argument is the idea employers can’t simply shove some investment brochures in front of their employees and let them choose. Rather, the employer needs to get the absolute best possible deal for their employees — the lowest fees for example — and select investments that yield an average or above-average rate of return (index funds are the obvious choice).
And in the past few years, courts have started to agree, counter to the ethos that informed the creation of the 401(k). In May, the Supreme Court overturned a lower-court ruling that would have let defined-contribution sponsors off the hook for monitoring the quality of the investment choices on an ongoing basis. In a rare unanimous opinion, the court declared that “under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones.”
This may well be true. But the ambiguity remains. We are caught between two very different philosophies of individual responsibility. On the one hand, workers are still expected to navigate the confusing world of retirement investments on their own. But much of the law governing those investments relieves employees of that responsibility.
Which is it? It may be time for Congress to wade into this mess and clarify, once and for all, the respective duties of employer and employee on the vexed question of retirement benefits.