How The Supreme Court Could Stop the 401(k) Rip-off

The Supreme Court of the United States has indicated an interest in deciding an important 401(k) case, Tibble v. Edison International. If the Supreme Court decides to hear the Tibble case, and if it decides it in a manner that will benefit investors, the impact could be profound.

Before discussing the issues at play in Tibble, it’s necessary to understand that mutual funds frequently offer investors a choice between institutional and retail shares. The underlying investment, regardless of which share class is chosen, is the same. The only difference is institutional shares have lower management fees. In order to qualify to purchase institutional shares, the minimum investment is higher than for retail shares.

The savings in fees to investors between retail and institutional share classes can be considerable, especially when compounded over time. For example, Vanguard offers retail shares of its popular Total Stock Market Index Fund, with an expense ratio (management fee) of 0.17 percent. The minimum investment to purchase the retail shares is $3,000. However, if you can satisfy the increased minimum of $10,000, you can purchase institutional shares of the same fund and incur an expense ratio of only 0.05 percent.

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