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A Costly Choice

Greg Spears

I RECEIVED A GREAT education at Northwestern University in the 1980s. But the school’s commitment to excellence seems to have fallen short when it comes to the 403(b) retirement savings plan for teachers and staff.

Northwestern’s plan offers a generous 5% match and more than 400 investment choices, according to court filings. The lengthy list contained some clunkers, though, such as retail-class mutual funds when the plan could have offered lower-cost institutional shares instead.

Three university employees sued in 2016, alleging they were being overcharged. In its response, the university said—among other things—that there were many fine investment options to choose from, including low-cost index funds.

Who’s right in this fund fracas? The Supreme Court sided with the employees in an 8-0 ruling issued Jan. 24. It’s not the employees’ job to sort the wheat from the chaff, so to speak. Plan trustees have a fiduciary duty to keep imprudent funds out of the plan entirely, the court found.

The case was sent back for reconsideration to the Seventh Circuit Court of Appeals, which had earlier found for Northwestern. But in the meantime, I’m prepared to draw two lessons.

First, trustees could do worse than stock a plan with low-cost, broad-based index funds. Lawsuits alleging excessive plan fees have become a cottage industry, and I hate to think what this one has cost my university.

Second, offering too many funds is harmful to retirement savings, according to Vanguard Group’s Center for Retirement Research. When confronted with choice overload, employees postpone enrolling to avoid a decision they might regret—like choosing the retail-class fund shares hiding inside an institutional retirement plan.

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