How The Supreme Court Just Improved Your 401k

If you are like most people I know, you probably aren’t too pleased with the fund choices you have available in your retirement plan at work and for good reason. 401ks are notorious for offering lousy funds with high expenses. Well, a recent U.S. Supreme Court decision may remedy that problem once and for all.

The Background

Typically mutual fund companies offer different classes of the exact same fund to different people. The only difference between these classes is the expense the investor pays. The retail versions are available to individual investors but they typically charge the most.

The institutional version is usually offered to large investors with at least $1 million to invest and the fees are usually a fraction of what the individuals pay. Even though you may not have millions to invest, retirement plans, regardless of how much money they have in them, typically have access to these lower cost alternatives. Sweet.

The problem is that many 401ks offer retail funds on the investment menu when the lower-cost institutional fund is available. This confuses employees and can needlessly costs them money. From now on, it’s a no-no.

Neal’s Note: Do you know what your fund is charging you? Find out by giving the prospectus a quick once-over. This won’t take you too much time and it’s very empowering. Take a look. You’ll be amazed to learn how these funds make their money.

How This Change Ruling Benefits You

The main benefit is that you can now save money by purchasing less expensive funds in your retirement plan. That means more of your money will grow to help you reach your retirement goals rather than be wasted in the pockets of mutual fund fat-cats.

And if push comes to shove, this law gives you the basis to sue your boss if they haven’t done the right thing which is to provide these lower-cost alternatives and get rid of the expensive choices.

But this is also a good thing for employers. This new law is a wakeup call. It serves as a reminder to the company that they have a fiduciary responsibility to provide the best retirement plan they can. And they are obligated, by law, to review the plan periodically and make sure it continues to serve the employees’ interests.

What You Should And Shouldn’t Do Now

First, find out what kind of funds you plan offers and make sure they are the least-cost alternatives.

You can do that by going to Morningstar.com, entering the ticker for your funds and then select “purchase”. This will show you if there are other cheaper classes available. If there are, gently ask your employer why the more expensive fund is still on the list.

While you’re at it, ask how often the fund choices are reviewed. If there hasn’t been a change to fund lineup for quite some time, your boss may not be fulfilling their fiduciary duty. That might expose them to a law suit which jeopardizes the viability of the company – and your job. You don’t want that to happen. So you’ll be doing them a big favor by bringing this issue to their attention as long as you do it sweetly.

What you should not do in my opinion is invest your retirement money solely based on fund expenses. My preference is to buy the least cost option available all things being equal. But there are times when the best performing funds cost a little more. Why save a penny on expenses if it costs me a dollar in worse perormance? It doesn’t make sense.

This new ruling is a win-win for everyone. It provides lower-cost funds for you and your co-workers and it gives your boss an opportunity to help the entire staff for free. Make sure your employer is complying with this new development. It’s in your own self-interest.

Does your 401k offer retail funds? Are institutional funds available? What are you going to do about it?