This week the Supreme Court issued its first decision on retirement plan fee issues. Tibble v. Edison International, No. 13–550, Supreme Court of the United States (May 18, 2015). In Tibble v. Edison International, the Court was asked to decide whether a claim that fiduciaries breached their duty of prudence was barred by the statute of limitations when the initial decision to include certain investment funds occurred more than six years before the claim was filed. The Ninth Circuit had found that such claims were time-barred. The Supreme Court disagreed, finding that plan fiduciaries have an ongoing duty to monitor investments and remove imprudent offerings from the plan line-up.
The Court declined to define the scope of the ongoing duty to monitor, sending the case back for further review of contours of the alleged breach of fiduciary duty. While many fiduciaries already actively monitor plan investment performance, the Court's decision is a reminder that plan fiduciaries may also be called upon to prove that they have done so. The Court's decision offers little guidance on what proof would be required, but we suggest that plan fiduciaries take the following actions now to help defend against any litigation and reduce the risk of liability.
Determine and Document Which Parties Are Responsible for Investment Decisions
A retirement plan often has various parties that have some fiduciary responsibility with respect to the plan, which may include the Board of Directors, a Board of Trustees, an administrative committee, an investment committee, or other outside advisors. In order to ensure that plan fiduciaries are taking the necessary steps to fulfill their duties, the plan sponsor should review and document the different roles of the various parties. A plan sponsor can describe these roles in any number of documents, including but not limited to, by-laws, charters, plan documents, and summary plan descriptions.
Review and Update Committee Charter
Generally, a plan sponsor will appoint a committee (usually either an investment or administrative committee) to be responsible for the selection, monitoring, and retention of the investment alternatives available under the plan. The committee may also be responsible for appointing investment managers and taking a variety of other actions. From a governance perspective, a plan sponsor, whether through action by its Board of Directors or Board of Trustees, should confer to the committee in writing the authority to select and monitor investment options and to take any other authorized actions. The committee’s charter should clearly describe the authority and duties of the committee.
Review and Update Investment Policy Statement
An investment policy statement sets forth the process that a plan sponsor will use to make investment-related decisions for a retirement plan. A plan’s investment or administrative committee (whichever is responsible for investment-related decisions) should use and follow the investment policy statement as the basis for measuring and evaluating fund investment performance. In essence, the investment policy statement is both the roadmap for all fiduciary investment decisions and a standard against which those decisions will be measured in any litigation. If your plan does not currently have an investment policy statement, now is a very good time to put one into place. If your plan already has one, it is a good time to review it and make any necessary revisions.
The policy should identify the investment objectives of the plan, describe the decision-making processes for selecting investment alternatives, and identify the procedures and benchmarking measurement indexes the committee uses when assessing investment performance of the funds offered by the plan, in accordance with the stated investment objectives. It should be kept up to date and reviewed, at least annually, by the committee.
Consider New Standards for Documentation and Minutes
Documentation detailing how a committee engaged in the required ongoing review and monitoring of the funds’ performance in the plan is essential. Fiduciaries should document their discussions of fund performance in a manner that shows, with each review, that they are making an active decision to replace or retain each plan investment alternative. Such documentation should describe the information plan fiduciaries considered and used to make a reasoned decision in light of such information. Where appropriate, it should refer to the investment policy statement. Fiduciaries should keep minutes of any meetings, and the minutes should provide sufficient detail of the issues considered, actions taken, and the procedures that were followed. Minutes should also be supplemented with copies of any additional documentation that was reviewed or considered during meetings.
Review Effectiveness of Any Outside Investment Advisor
Many committees have retained an independent, outside investment advisor to assist them with analyzing the funds’ performance. Those that have retained such an advisor should evaluate the effectiveness of that advisor and the nature of the services provided on a regular basis. Committees that have not engaged an independent investment advisor may want to consider doing so to assist with ongoing decisions relating to a plan’s investment alternatives. Such an advisor may offer guidance and recommendations to the committee in the selection and retention of investment alternatives available under a plan, as well as assistance in the monitoring of fund performance. An outside advisor brings additional resources that will assist with the committee's decisions and the advisor can also offer independent third-party analysis.
Conduct Fiduciary Training
Providing fiduciary training to those responsible for overseeing retirement plans is a cost-effective way to help fiduciaries understand their responsibilities under ERISA. Recently, the U.S. Department of Labor has been asking plan sponsors about the training provided to plan fiduciaries during plan audits. Fiduciary training also enables fiduciaries to better manage potential liabilities from both a legal and corporate compliance perspective. If you have recently added new members to your plan's committee or if you have not offered fiduciary training in the last three years, this is an excellent time to schedule that training.