NEW YORK – The unanimous Supreme Court decision in Tibble v. Edison has once again stoked ongoing fears in the financial services industry that the Obama administration might be preparing for a takeover of private retirement savings.
Some economists believe the court decision sets the ground for the administration to begin nationalizing 401(k) retirement savings plans under the banner of protecting individuals from predatory financial planners. The administration has in mind planners who recommend mutual fund investments on which they receive excessive commissions and fees, which curbs an investor’s gains during the 401(k)’s tax-deferred accumulation phase.
Yet most economists read Tibble much more narrowly. They argue that the justices’ only concern is that an objective methodology be implemented that forces financial planners to make recommendations on the basis of performance, avoiding mutual funds with high loads and fees that benefit financial planners unreasonably.
Is Obama planning to grab your 401(k)?
Economist Martin Armstrong, writing on his blog ArmstrongEconomics.com, asserted the Tibble decision “sets the stage to justify government seizure of private pension funds to protect pensioners.” He noted that 401(k) plans are part of the private pension market he estimates currently totals about $19.4 trillion.
Clearly the size of the retirement savings market is attractive to a federal government at a time when the federal deficit has increased some 80 percent in the past six years, with the federal debt now totaling more than $18 trillion.
An Investment Company Institute report published March 25 suggests the U.S. private retirement savings asset market may be even larger than Armstrong estimates. The ICI pegs total U.S. retirement assets at $24.7 trillion as of Dec. 31, 2014, with IRA assets estimated as $7.4 trillion and 401(k) assets at $4.6 trillion of that accumulated total.
The fear that the Obama administration may seek to grab private retirement assets is not entirely unjustified, as WND has reported. In 2010, the Obama administration began exploring strategies that would require hundreds of billions of dollars in programs such as 401(k)s and Individual Retirement Accounts, IRAs, to invest in U.S. Treasury bonds. The aim would be to lock in secured maturity values while providing the federal government a means of funding the $1.5 trillion a year needed to keep the government operating under the federal budget deficit estimated by the Congressional Budget Office.
In 2012, WND reported that in its annual budget proposal, the Obama administration endorsed “Automatic IRAs,” a plan introduced into Congress by Sens. John Kerry, D-Mass, and Jeff Bingaman, D-N.M. According to the plan, private companies would be automatically enrolled in government-mandated IRAs, forcing those businesses to contribute on behalf of their employees a “default amount” equal to 3 percent of an employee’s pay, unless the employee specifically opts out of the plan.
Earlier this year, WND reported the concern expressed by Rush Limbaugh that Obama intends to extract money from private retirement accounts. He cited the White House’s proposed fiscal year 2016 budget as proof Democrats have a plan to tax retirement accounts as a means of funding the administration’s ever-expanding social welfare, including services for the estimated 5-6 million illegal immigrants given “deferred deportation” under Obama’s executive actions.
Supreme Court disciplines financial planners
Columnist Chuck Jaffe, writing in MarketWatch.com, said the Supreme Court’s reasoning in Tibble is a simple idea that impacts all retirement savers.
“Workers should have access to the best fee structures available for their retirement plan,” he said. “The company providing or overseeing the plan has a responsibility to employees to make sure that the investments – and most importantly the fee structure on the plan – is the best available.”
Narrowly viewed, the Supreme Court decided in favor of the beneficiaries of a 401(k) savings plan established by Edison, a California-based utility. The company in 2007 sued the financial counselors who offered six, higher-priced, retail-class mutual funds offered as investments, when materially identical lower-priced, institution-class mutual funds were available to larger investors.
The litigation did not challenge any of the other roughly 40 mutual fund options offered to Edison employees.
The decision carefully argued that by offering only the higher priced version of the six mutual funds in contention, the plan advisers had breached a fiduciary duty under the Employee Retirement Income Security Act, or ERISA.
“Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset,” wrote Justice Stephen Breyer, who delivered the opinion for the unanimous Supreme Court.
The case is also noteworthy in that the Supreme Court extended the responsibility of 401(k) financial planners beyond the six-year limitation applied to employers and plan representatives under ERISA. The fiduciaries of the Edison 401(k) plan had picked some of the retail-class mutual fund investment options in 1999, and the case was filed in 2007, more than six years after the mutual funds in question had been selected.
Jaffe’s response to Tibble was generally positive.
“Plan sponsors now have an ongoing responsibility to monitor a plan and to make sure that if something better comes along – an improved fee structure, lower-cost alternatives and more – the plan keeps up with the times,” he wrote. “Workers now can more easily sue employers whose plans are not managed with the employee’s best interest placed first.”
Jaffe also properly noted that while the Supreme Court decision focused on mutual fund commission issues, the decision also impacted fund performance issues.
“The case focused on fee structures rather than investment performance, but there’s a good chance it will force plan managers to make sure they aren’t hanging on to below-average options for too long, forcing regular upgrades to the options offered to workers based on what has been working recently,” Jaffe wrote.
He noted that the issues of how rigorously and frequently plan options must be reviewed were remanded to lower federal courts for resolution.
Jaffe also pointed out that while a mutual fund with a sales charge of 0.25 percent of total assets may seem indistinguishable to the non-professional from a materially identical mutual fund with a sales charge of 0.50 percent, the difference in investment performance results over time can be considerable.
Jaffe’s main concern is not that the Tibble decision is a prelude to an Obama administration takeover of the 401(k) business under an argument that the government can best ensure the retirement saver is not cheated by an unscrupulous investment adviser. His concern is that forcing employers to place in 401(k) investments the best performing funds available may make offering the plans unprofitable to employers and investment planners.
“There’s a tipping point where the costs of offering a plan to everyone outweighs the benefits the small-business owner gets for themselves,” Jaffe cautioned. “This ruling likely pushes that point to where a lot of small-company operators don’t give workers any retirement plan.”
By deciding the case in favor of the plaintiffs, even though the case was filed after the six-year ERISA statute of limitations, several commentators also concluded the Supreme Court has made it easier for 401(k) retirement savers to sue plan fiduciaries. They warn some employers may decide the 401(k) business has become too risky to justify offering plans to their employees, while some financial planners currently advising 401(k) plans may decide to get out of that particular business.
Other commentators were concerned the Supreme Court decision could result in a consolidation, particularly of the popular index fund industry, with loads and fees converging to the lowest possible level, in a race to the bottom that may make the offering of index mutual funds unprofitable for all but the largest providers.
In the final analysis, the Tibble decision is almost certain to require all who offer 401(k) plans, including employers, independent financial planners and financial institutions, to develop reliable, computer-driven, statistical-based decision analyses. They will need to demonstrate to regulators and jurists alike that the mutual funds they offer can be justified on the basis of performance alone, without any consideration given to compensation earned by fiduciaries and plan sponsors.