UPDATE: The Supreme Court issued its unanimous opinion in Tibble on Monday, May 18. The Court ruled in favor of the 401(k) participants and held that ERISA’s fiduciary duty requires a continuing duty, “separate and apart from the duty to exercise prudence in selecting investments at the outset,” to monitor plan investments. Significantly, participants will be able to bring a claim of breach of the continuing duty of prudence so long as the alleged breach occurred within six years of the suit. Employers, therefore, must undertake consistent quarterly or annual reviews of investments, and must systematically consider the prudence of each investment at that time. Read the Court’s opinion here.
On February 24, 2015, the U.S. Supreme Court heard arguments in the case of Tibble v. Edison International, a lawsuit that centers on an alleged breach of fiduciary duty by a 401(k) plan sponsor. The oral arguments in Tibble come right on the heels of a handful of multi-million dollar lawsuits against plan sponsors that allege ERISA violations of fiduciary duty – the most recent of which concluded when, in December, Lockheed Martin settled a class action for $62 million. While a decision from the Supreme Court in Tibble has yet to be issued, the mounting scrutiny retirement plan sponsors face is undeniable.
Issues at Play in Tibble
The Tibble Plaintiffs are participants in their employer-sponsored 401(k) plan. They allege that their employer and plan sponsor, Edison, violated its fiduciary duty to plan participants by failing to monitor investments and discover that lower-cost institutional share classes were available in place of the more expensive options initially selected. Edison argued that ERISA, which governs 401(k) plans, limits the time that plaintiffs can sue over funds to six years from the time the funds were originally offered or selected, which would bar the Plaintiff’s claim.
Ultimately, the question before the Supreme Court implicates the fiduciary duty to prudently monitor investment selections. The Court must decide whether plan fiduciaries have a continuing duty of prudence that requires the ongoing monitoring of plan investments, or whether the duty is measured at only one point in time when the investment decision is initially made. A decision by the Court in favor of the Plaintiffs could significantly widen the scope of a plan sponsor’s fiduciary duty of prudence to require ongoing monitoring of investments and related plan expenses.
Best Practices for Plan Sponsors
The result in this case is far from certain, but plan sponsors can be sure that their investment decisions will attract more attention from participants. Current best practices include establishing a formal investment committee to meet regularly to review the plan’s investments. Meeting intervals will vary depending on the size and complexity of the plan but at minimum, the committee should meet on an annual basis. The procedure of committee meetings should be clearly spelled out in the plan’s Investment Policy Statement (IPS). Although not required by ERISA, an IPS establishes a defined process for prudently managing investments and expenses.
Plan sponsors need to be concerned, too, with the source of their investment advice. The U.S. Department of Labor, with recent endorsement from the Obama administration, proposed a rule to hold brokers to a fiduciary standard. At this point, only a Registered Investment Advisor works in a fiduciary capacity, which requires the Advisor to render advice that is in the best interest of the client. A universal fiduciary standard for brokers would change the way retirement plans are serviced, as well as how third party advisors can be compensated. Consequently, plan sponsors must understand how their advisors are compensated and whether those advisors work in a fiduciary capacity.
Regardless of the Tibble outcome, plan sponsors must take seriously the duty to prudently select and review plan investments and expenses. Investment policies should be implemented and trustworthy advisors retained in order to effectively meet evolving fiduciary standards.