Earlier this week, the Supreme Court released a sweeping 9-0 ruling determining that employers can be sued if they do not fulfill their “continuing duty to monitor” 401(k) investment funds for unnecessarily high fees.
The decision, Tibble et al. v. Edison International et al., involved Edison International, based in Rosemead, California, and dealt with the increasingly controversial issue of fees in retirement plans. Many fees, including those of investment managers, are paid indirectly through deductions to the gains and losses of investment funds. Recent regulations have shifted towards more transparency from fund managers, but the high court’s ruling shifts responsibility over monitoring away from plan participants and towards employers and plan administrators.
The lawsuit, which has raged on since 2007, involved allegations by Edison employees that the employer violated its fiduciary duty by not selecting lower-cost institutional classes that were comparable to higher-priced retail funds offered in the plan.
The Supreme Court cited a continuing duty to “monitor and improve” plan investments, which extends beyond the initial selection of investment funds. The decision will likely boost several pending class-action suits and result in an increase in litigation over similar claims.
According to the Los Angeles Times, “[o]bservers said the Supreme Court decision would heighten responsibilities of 401(k) plan administrators, who are already fiduciaries under ERISA but may not be exercising proper due diligence.”
It’s important to note that the decision does not require plans to provide cheaper funds. Rather, it puts the onus on plan administrators to have a process by which various options available to the plan have been dutifully considered and to be able to demonstrate satisfactory reasons for their conclusions.
Plan administrators should take stock of their current practices regarding their fiduciary duties and investment monitoring. Boards, committees, and individuals charged with plan governance would do well to consider some of the following courses of action:
- Obtain fiduciary training for key plan management personnel who execute fiduciary duties.
- Evaluate investment advisors who assist in the selection of plan investments for potential conflicts-of-interest.
- Plans should seek advisors that will assist plan management in fulfilling their fiduciary responsibilities. Luckily, in recent years an increasing number of advisors with qualified plan expertise have come on the scene with a focus on more than investment advice.
- Don’t let your plan operate on “auto-pilot”. Plan governance is an active role and the reasoning for key decisions should be clearly understood and documented.
Nathan Johnston, CPA