PERSONNEL MATTERS: Supreme Court hands down key 401(k) decision
By Darla Mercado, Crain News Service
WASHINGTON (May 19, 2015) — The U.S. Supreme Court made its decision on a key 401(k) lawsuit May 18, and the takeaway for retirement plan advisers is a simple one: Keep a close eye on your recommended fund lineups and review your contracts with plan sponsors.
The retirement plan industry has been eagerly awaiting the outcome of Tibble v. Edison, a suit that was initially filed in 2007 and was among the first lawsuits brought by employees against their employers for fee-laden funds in the 401(k) plan.
In this particular case, the participants had claimed that their retirement plan had a selection of 40 funds, six of which were retail share class funds and thus more costly than institutional share class funds. In 2010, the U.S. District Court for the Central District of California granted the plaintiffs a judgment of $370,732, stemming from damages related to high fees in three of the retail share class funds. Litigation on the other three funds moved to the 9th U.S. Circuit Court of Appeals and eventually to the Supreme Court.
At the center of that conflict is the question of whether the six-year statute of limitations on breach of fiduciary duty protects plan fiduciaries from keeping imprudent investments in the plans if those funds were added more than six years ago.
In its May 18 decision, the Supreme Court referred back to 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 higher court then sent the case back to the 9th Circuit to consider the plaintiffs' claims that Edison breached its duties within the six-year period, “recognizing the importance of analogous trust law,” according to the decision.
So what does that mean for advisers who work with plans?
There are takeaways for plan sponsors, as well as advisers at broker-dealers or RIA firms, according to Jason C. Roberts, CEO of the Pension Resource Institute.
Plan sponsors shouldn't just review the performance of the funds in the plan, but consider their fee policies and whether they're prudent and in accordance with the plan documents. Those items should be reviewed annually. “Share classes are such a hot item,” Mr. Roberts said. “Plan sponsors need to look at that periodically and document that the share class, revenue sharing and allocation methods are fair.”
Advisers and their firms, meanwhile, need to make sure their plan sponsor clients are aware that they themselves are giving the adviser direction on the universe of funds that can be chosen for the menu.
“We want to know what are the plan's objectives with respect to share class and revenue sharing,” Mr. Roberts said. “Is the company paying the expenses to administer the plan? Are they paying for the plan less revenue share? That question at the start of the investment policy statement helps rein in your liability.”
This way, advisers know exactly what they're supposed to do, and plan sponsors have no misconceptions about their duties as plan fiduciaries.
“We want the plan sponsor to know that when it comes to administrative decisions about how the plan pays for services, [the adviser] can give you guidance but it's not a securities recommendation, and we're not recommending this fee policy over another,” Mr. Roberts added. “But you can recommend funds that are congruent with that policy.”
Ongoing duty to monitor
Marcia Wagner, managing director at The Wagner Law Group, noted that while the big question on everyone's mind is whether six years is enough for someone to be free of liability from a fiduciary breach, advisers should assume that they are never off the hook.
“You have to be looking in your lineup continuously,” she said. “Basically, it means you have an ongoing duty to monitor, and it's hard to say that you have a statute of limitations argument.”
Though now is a good time for employers to undergo a review of their benchmarks and processes, the timing of that review is still unclear, according to Michael Graham, an attorney with McDermott Will & Emery. He believes other plaintiffs' attorneys may try to suss that out with more litigation.
“Is it annual, quarterly?” he asked. “There will be a lot of feeling out from the employers' perspective of matching costs and administrative issues with that duty versus how aggressive the plaintiffs' bar will be in raising new claims.”
This report appeared on the website of Investment News magazine, a Chicago-based sister publication of Tire Business.
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