US Supreme Court Holds 401(k) Fiduciaries to a Higher Standard
by Vita, on May 28, 2015
The Supreme Court made its long-awaited decision in the Tibble v. Edison International ERISA case on May 18th. The Court’s decision echoes what we at Vita Planning Group have been advising for three decades: regularly review your plan to the highest standard of fiduciary care.
The initial suit dates back to 2007, when participants of Edison International's plan argued that the fiduciaries violated their duties with respect to mutual funds that were added years prior (three from 1999 and three from 2002). The plaintiffs claimed that Edison fiduciaries acted imprudently by offering higher-priced retail share classes instead of less expensive institutional share classes.
The Supreme Court ruled on the question of whether ERISA’s six-year statute of limitations period (on breach of fiduciary duty) protects plan fiduciaries from keeping “now imprudent” investments in their retirement plans, if those funds were added more than six years prior. The lower court ruled in favor of Edison, however, the Supreme Court overturned this ruling based on the common law of trusts. Justice Stephen Breyer wrote, “ERISA’s fiduciary duty is derived from the common law of trusts, which provides that a trustee has a continuing duty – separate and apart from the duty to exercise prudence in selecting investments at the outset - to monitor, and remove imprudent, trust investments."
The Supreme Court ruled that, despite the statute of limitations, there is an ongoing fiduciary responsibility to monitor the appropriateness of investment options in a retirement plan, even if they were selected more than six years prior. If an investment option is in a plan today, no matter when or why it was placed there previously, the fiduciaries must assess and confirm that it remains appropriate and viable under the current regulatory guidelines and the policies established by the Plan. The fact that the plaintiffs in the Tibble v. Edison case had exceeded the DOL’s time guideline for disputing funds in a plan was deemed not to be a defense. Vita has always stressed that plan fiduciaries can never give away their responsibilities. This ruling goes one step further: there is no arbitrary time limit on that responsibility.
By basing its ruling on the law of trusts, the Supreme Court emphasized that fiduciaries have a “continuing duty to monitor” plan investments. However, the Supreme Court’s decision did not give any guidance as to the scope of a fiduciary’s duty to monitor. In the 30+ years that Vita has been a Registered Investment Advisor sharing fiduciary responsibility with retirement plan clients, dealing with the Department of Labor and consulting with auditors and ERISA attorneys, we’ve developed our own view of best-practices for plan and investment reviews.
Over the years Vita has established best practices for our clientele to monitor the operation of retirement plans and the investment options made available to participants to help mitigate fiduciary liability. What does that look like?
- The review process must be comprehensive and systematic:
- Bringing all the relevant documents together
- Regular meeting cycle, reviewing the plan at least once a year
- The plan review process must cover operational issues of greatest interest to (and possible sanction by) the DOL:
- Knowing and following the terms of the Plan Document
- Timely remittance of participant contributions
- Discrimination testing
- Disclosure of fees
- The investment review process should be guided by an Investment Policy Statement (“IPS”)
- Fund selection and removal according to the IPS
- Funds placed on the Watch List must be dealt with in a reasonable timeframe and not allowed to linger indefinitely
- Annual determination as to the “reasonableness” of fees
- All meetings and decisions by the fiduciaries to the plan must be documented.
Monitoring does not stop at the plan review meeting; it is an ongoing process. At Vita, we keep copies of client Plan Documents and annual submissions. We help with any questions about the administration of the plan and statutory filings. We monitor Plan investments on a daily basis, allowing us to identify any red flags to be addressed immediately by the Plan sponsor. In this we have always been a firm that strives to not just meet but exceed industry standards, and Tibble v. Edison International brings affirmation to our already well-built practices of serving our clients.
To learn more about meeting your fiduciary responsibilities, please join our upcoming educational webinar: