The Supreme Court puts high 401(k) fees on notice

By now, you'd have to be Rip Van Winkle to be unaware that high management fees are dangerous to your retirement savings. Thankfully, the highest court in the U.S. seems to agree.

Last week the Supreme Court ruled that 401(k) plan sponsors have a fiduciary duty to seek the lowest-cost funds that are readily available for their plan participants. This ruling is yet one more powerful message that you should be paying close attention to the fees in your 401(k), IRA and other retirement investments.

The Supreme Court made a relatively straightforward ruling against Edison International, which offered retail mutual funds to its 401(k) plan participants instead of lower-priced institutional funds that were available. While the ruling has other legal details, the main message to plan sponsors and their participants is that minimizing unnecessary investment management expenses is a serious and important goal.

In similar cases, much of the judgment awards have been made in favor of plan participants. The latest ruling might encourage similar lawsuits, which would certainly serve as a wake-up call to executives across the country who manage their company's 401(k) plans.

What does this mean to you? The bottom line is clear: With any investment, whether it's a 401(k), IRA or regular investments with no special tax advantages, you'll accumulate more money for retirement if you can minimize management fees. When you're drawing down your savings in retirement, your money will last longer, and you'll realize higher retirement income if you can find low-cost investment and insurance products.

It's just that simple. So, don't let advisors or financial institutions convince you that higher fees are better for you. They're not.

If you're participating in a 401(k), you can find fee information in the fee disclosure statement that's required to be available to you. You should also compare the level of fees in your plan against plan benchmarks on websites such as Brightscope.

Once you've done your homework, if you discover that your 401(k) plan's fees are higher than average, politely ask your employer to offer lower-cost funds. If enough of your co-workers create a demand, your employer might listen. And if you really want to turn up the motivational heat, tell your employer about the latest Supreme Court ruling.

If you're investing in an IRA, ask the IRA provider to show you the level of fees that you'll pay in language you can understand. Look for index funds with annual fees under 0.20 percent (20 basis points) -- the lower, the better. Fidelity Investments and Vanguard offer several index funds in this range to retail investors, with their lowest-cost funds under 0.10 percent (10 basis points).

Look for actively managed funds with annual fees well under 1 percent (100 basis points) -- the lower, the better. Again, Fidelity Investments, Vanguard and many other mutual fund companies offer funds with annual expenses in this range or lower for retail investors. There's simply no good reason to be paying higher fees.

If you need professional advice, find advisors you can pay by the hour or by the project, rather than continuing to pay them year after year through a percentage fee that's applied to your accounts in a manner similar to investment management fees.

The bottom line: High investment management fees are the equivalent of a leaky faucet on your savings. Make sure you turn them off.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.