The U.S. Supreme Court recently ruled in the case of Tibble v. Edition International. The decision will surely have unintended consequences.

A bit of background:

Current and former employees sued Edison (a California-based utility) claiming breach of fiduciary responsibility. The claim? Retail mutual funds in the 401(k) charged higher fees than identical Institutional funds available to larger investors.

It’s a good argument. Workers should have access to the lowest internal operating cost. Employers providing and/or overseeing 401(k)s should ensure such access.

The case poked a hole in the 6 yr statute of limitations that applied to employers and plan representatives under ERISA. (Edison’s plan sponsor selected the Retail funds in 1999 – the case was filed more than 6 yrs later.)

Nonetheless the result (at least related to cost) is good. Employers now have an ongoing responsibility to monitor plans ensuring that if something less expensive comes along plan participants have access. Employees now can more easily take legal action against employers whose plans violate the fiduciary standard of placing the employee’s best interest first.

Although it’s a well-meaning decision set upon the best of intentions there are potential problems for employees. They’re not readily apparent but expect them to surface over time.

Here’s what it could mean to your 401(k):

(1) Many small businesses will no longer offer a 401(k). No employer wants to offer a plan with high costs but this is often what the “little guy” has available. Plan sponsors always stick small businesses with higher-cost index funds and more-expensive share classes. Eventually the tipping point is reached where the risk of being sued for choosing higher-cost options outweighs the benefits of offering a plan. The losers are the employees who will not have access to a 401(k) and, similarly, not receive company matching funds. The derivative loser is the American taxpayer who will be forced to pay for the retirement that employees will no longer contribute to on their own.

(2) Fewer small plans will offer index funds as an investment option. An index fund with a cost of 0.1% may be better than an actively managed fund charging 0.8% but it still fails in comparison to an index fund charging 0.08%. Tibble would apply. To avoid being sued for not offering the least expensive index fund employers may do away with them altogether. The consequence is clear – employees will be left with fewer overall low-cost options.

(3) Nebulous funds that are difficult to compare will find their way into 401(k) plans. The Supreme Court ruled higher Retail fees were unreasonable given identical Institutional funds with lower costs were available. Plan sponsors will get around this by offering similar but not identical investment options. Historically fund companies offered “A” class Retail shares and “R” class retirement shares – identical investments with differing cost structures. The Tibble ruling would therefore apply. We should expect to see more fraternal twins rather than two funds coming from the same embryo. Fund companies will offer the ABC Retirement Fund. It will be invested similarly but not identically to the ABC Fund thus sidestepping Tibble. Goodbye lower-cost option of an identical fund. Hello confusing fund comparisons.