Gartenberg Standard and Mutual Fund Fees

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It’s not often that the Supreme Court takes on a case with such a key personal finance subject, mutual fund fees, so when the highest court in the land made a ruling last week, I perked up. The case was Jones v. Harris Associates and it concerned Harris Associates’s Oakmark funds. Shareholders owned Oakmark funds through their employer’s plans and were charged a management fee of 0.88%, versus the 0.45% fee charged to Harris Associates’s institutional clients. The plaintiff’s argument was that they were being charged an excessive fee compared to Harris’s clients, in this case almost twice as much.

The Supreme Court unanimously ordered the appeals court to adopt the Gartenberg Standard for mutual fund fees, established in Gartenberg v. Merrill Lynch Asset Management, which stated that in order for the fee to be deemed excessive, it had to be “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.” Yeah, it’s pretty vague but it’s the legal standard.

While lawyers and professors can argue the nuances in the ruling, how Jones v. Harris modifies the Gartenberg Standard or how this ruling favors investors over funds, or vice versa, the end result for the investor is the same. Do your research and compare the expense ratios of whatever you invest in. If you are investing through your employer’s plan and only have access to a limited set, pick the best one for you or lobby your administrator to offer more options.

Invest in funds that charge you a fair rate for what you get and remember to shop around. You are the final arbiter of where your money goes and you are solely responsible for your financial future.

{ 14 comments, please add your thoughts now! }

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14 Responses to “Gartenberg Standard and Mutual Fund Fees”

  1. Good advice, but the truth is that too many are lazy, financially illiterate, or don’t have any choice when it comes to 401k plans.

    Sad, isn’t it?

    Thanks for your effort to educate people.

    • cubiclegeoff says:

      I agree. Many times people have little choice of what plan they have. Although if you’re ok with causing trouble at work, you could always fight to get a better deal or have the 401k switch to another company.

  2. jim says:

    It sounds like the fee in question was not hidden or anything. Unless there was deception involved with the fee then I’m puzzled why the case would get that far. Theres tons of mutual funds with fees well over 0.8% and its certainly not illegal to charge different fee rates to different size customers.

    If they don’t like the 0.88% fee then dont buy it. Hardly seems like its worth suing up to the Supreme Court.

  3. Paying attention to expense ratios is great advice. People are giving away their retirement to Wall Street. If you don’t have a match at work contribute max to IRA and pick your own ETFs or funds. A big group getting picked off are those working for small companies. Larger companies typically use Fidelity or Vanguard and offer low cost index funds. It all fits together – use Registered Investment Advisors not Broker Dealers, pay attention to expense ratios, and by all means avoid any kind of load.

  4. billsnider says:

    It still all comes down to where you get the best return.

    In many cases your 401(k) plan limits you. When it doesn’t, you should compare rates for the same fund under different ownership plans (A, B, etc.)

    And the comment that Wall street is making mucho money off our backs is CORRECT. The way to defeat them is to get educated and do your homework.

    Bill Snider

  5. billsnider says:

    One other thought.

    Here is a good website to get educated…

    There is also a podcast at that has a good 2 hour discussion to learn about investing.

    Bill Snider

  6. zapeta says:

    I’m thankful my employer has some low fee index based investments, because the actively managed investments we have access to have fees in the neighborhood of 1.00%

  7. tbork84 says:

    I am grateful that my company has access to vanguard target date retirement accounts that mix it up in vanguard index funds based on your projected retirement date.

    Its a very simple and important step for the Supreme Court to say that the actions of some mutual funds as far as fees go can be unlawful. Since not everyone has the wherewithal or options to choose otherwise.

  8. Dave says:

    As a little guy, I’ll take it. I think the reason they probably got hit was because it was part of a 401(k). If it were being sold on the open market, its buyer beware. My wife’s company 401(k) has TERRIBLE funds to chose from (I actually think this Oakmark fund is one of them) and I think the cheapest has an expense ratio of around 0.80% and the highest in the range of 1.5%. We contribute to it because with the tax breaks, its still better than the open market, but there isn’t much we can do. If they raised rates on her funds, we’d have no choice but to pay them and I imagine that’s what happened here.

  9. RJ Weiss says:

    A little surprised that the ruling was filed against a fund that was charging .88%. A lot of funds charge a lot higher.

    • Here’s the issue:
      for exactly the same fund if an institution invests in it (for example the IBM defined benefit plan) versus you investing in it in your company 401(k), you get charged .88% and the IBM Defined Benefit Plan gets charged .20% for example.
      This is like your company CEO going to the movies and being charged $4 for a ticket and you, behind him or her in line, have to pay $10.

      • Texas Wahoo says:

        Actually, it’s more like when you go to Sam’s and get a better price because you’re buying in bulk.

        For most mutual fund companies, anyone can be an institutional investor, you just have to buy enough shares. Think of it like Vanguard Admiral Shares, but on a larger scale.

  10. eric says:

    A moment when some people learn to appreciate (or further hate) their 401K options.

  11. I think you said it perfectly Jim:

    “Do your research and compare the expense ratios of whatever you invest in.”

    The key is always to do the proper research to make a good decision. Regardless of whether the fees were double for some clients as opposed to others should not matter. There are plenty of funds out there to choose from.

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