The U.S. Supreme Court ruled last week that employers have a duty to protect workers in their 401(k) plans from mutual funds that are too expensive or perform poorly.
Monday's unanimous ruling sends a strong signal that employers must improve their plans. And it comes just as the Obama administration prepares a landmark change of its own by issuing rules requiring that financial advisers put the interest of customers ahead of their own.
The high court ruled on a class-action lawsuit against Edison International. St. Louis lawyer Jerome Schlichter, who has made a cause of suing 401(k) plans to get them to shape up, brought the case on behalf of 20,000 retirees and workers at the large Southern California utility company.
The message here is not that all 401(k)s are bad or too expensive. In fact, costs have fallen 30 percent over the past decade, according to the Investment Co. Institute, as more plan sponsors turn to low-cost passive investing options.
But costs vary widely. Plans with more than $100 million in assets usually have total annual costs below 1 percent, and the biggest plans usually are below 0.50 percent, according to BrightScope, which tracks the industry. In small plans, costs can be as high as 2 percent.
Financial service companies can charge a range of management, administrative, marketing, distribution and record-keeping fees for 401(k) plans. Employees are paying 87 percent of all fees, according to a study for ICI by Deloitte Consulting.
Most workers do not know they bear the lion's share of costs. A 2011 AARP survey found that 71 percent of retirement savers do not think they pay any investment fees at all.
Yet fees make a huge difference in returns over time.
The court decision will put pressure on large plans to cut costs further but will not have much impact on smaller plans, says John Rekenthaler of Morningstar Inc.
In particular, he expects more big-plan sponsors to push for better deals than institutional funds by demanding "separately managed" versions of funds that offer specialized attention but also cut management fees to the bone.
Even the bigger picture is looking brighter.
With a retirement security crisis looming, the court ruling and the Obama administration's push for stronger fiduciary rules send a strong message: We need a more efficient, consumer-focused retirement saving system.
Mark Miller is a Reuters columnist