If you are not happy with the way your 401(k) plan adviser has invested your money, then, according to the recent Supreme Court ruling, you should invest somewhere else. In a decision that is clearly a victory for the mutual fund industry and a loss for investor trying to keep fees from overtaking their investment returns, this ruling turns the responsibility of who to invest with back to the individual.
To bring you up to speed on why the Supreme Court had any say-so in this problem you must first understand the relationship between Oakmark funds and Harris Associates. Harris represents the fund family as an administrator for numerous plans. Ironically, and this is why investors chose to sue the plan sponsor for charging fees that were greater than Harris charged for pensions it also managed. The assertion that because Harris elected the board of directors and in effect gave those board members a rubber stamp, the fees were based on whatever Harris saw fit to charge.
The Supreme Court felt otherwise. According to Eric Brunstad, a partner at law firm Dechert LLP who filed a brief on behalf of Harris: “The decision is very stabilizing for the entire industry. It is good for mutual funds, it is good for the investors, it is good for everybody”. The Investment Company Institute, the mutual fund industry trade group, as expected they might, praised the ruling. Judge Alito suggested that the board of directors would only come under additional scrutiny if they withheld certain information for the investors. The Court believed that the falling fees in the industry over the last 20 years points to a positive change.
I tend to think otherwise. Yes fees have fallen. Yes the industry has improved its transparency. But the relationship a fund family has with the plan administrator should be more clearly defined. Although some believe the Court ruled more or less down the middle, it opens the door to allowing fees that are suggested by the wrong party and often for the wrong reasons as necessary to administrer the plan.
If anything, the repercussions this decision has on your retirement portfolio will be far reaching. The bottom line: if the plan decides the fees they are charging are reasonable, the highest court in the land is on their side.
More on this decision here and here.
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