Sonia Sotomayor, facing a dispute between employees and General Motors over the company's management of its workers' 401(k) plans, sided firmly with management in an overlooked decision handed down just weeks ago.
The decision came on May 6, just a week after the resignation of Supreme Court Justice David Souter and after it was clear that she was on the White House short list to replace him. The decision was published as a "summary order," meaning that it was not published in the federal court reporter and was not intended to set precedent. (Read the decision.)
The GM employees were joined in the case by the Bush administration's Department of Labor -- not one to take the side of employees lightly.
But in fact, summary orders are important because judges and attorneys refer back to them for guidance, in effect, setting precedent. And the precedent this one set won't help employees whose 401(k)s have already been battered by the economic collapse.
The dispute that landed in the courts arose originally after General Motors contracted with Fidelity Funds to manage its massive defined contribution account. Previously, General Motors Investment Management Corp. had controlled the several billion dollars in employees' retirement funds.
That's a valuable account for a fund to manage, the kind that can entice a financial firm to offer a deep discount on account fees. And those fees add up. An extra one percent in fees per year adds up to a retirement fund 28 percent smaller over the lifetime of the account, a Department of Labor study found. So GM employees were ticked when they realized that their company had outsourced management of their funds but hadn't received a discount from the money manager.
The law requires a company to take fiduciary responsibility for these assets. In other words, it's the company's legal responsibility to handle the money in the best interests of its employees.
In this case, the employees argued that GM "knew or should have known that fees and expenses for Fidelity Funds were excessive as compared to alternative investments [since] . . . similar investment products were available with substantially lower fees and expenses." Fidelity Funds, they argued, "caused the Plans to lose millions of dollars a year in excess fees."
Even if that's true, was not enough, Sotomayor and her fellow judges determined. Citing Gartenberg v Merrill Lynch Asset Mgmt, the judges ruled that in order to be excessive the "the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining."
The Gartenberg case had previously been applied to mutual funds, where customers are free to take their funds elsewhere when they don't like the fees being charged. Applying it to 401(k)s, where employees are captive, expands it dramatically.
Lawyers spoken to by the Huffington Post cautioned that the Employee Retirement Income Security Act (ERISA) is highly specialized and that the ruling could be justified on very narrow grounds and doesn't indicate a broader philosophy. Others, however, said it was a piece of evidence that despite her humble background, she leans toward the corporate world in her judicial philosophy.