Many employers offer 401(k) and other retirement plans for their employees as part of the cost of doing business. Too often, retirement plans are established and operated without much thought given to the numerous legal obligations that plan fiduciaries have, leaving employers vulnerable to challenges by their own employees as well as governmental agencies auditing their plans. A particular point of vulnerability are the investment choices that employers make for their retirement plans.
Plan committees and other fiduciaries in charge of selecting investments for a retirement plan are bound by law to make prudent and diverse investment choices and to monitor those choices periodically. These duties also apply to 401(k) plan fiduciaries who choose the menu of investment options from which employees may select investment of their own plan accounts. The U.S. Supreme Court recently underscored the seriousness of these duties by allowing employees to challenge some fiduciary decisions made years ago.
FACTS OF THE CASE: In Tibble v. Edison International, 401(k) plan participants sued plan fiduciaries because of certain expensive mutual funds that the fiduciaries had selected for the plan. The Edison 401(k) plan held $3.8 billion and served 20,000 participants. Since it was so large, the Edison plan could have offered investment-class mutual fund options to plan participants that had much lower fees than the identical retail-class funds offered.
The employees sued Edison to recover losses suffered by the plan for the extra fees that the plan paid as a result of the fiduciaries’ choosing more expensive retail fund investment options.
Edison argued that the participants’ lawsuit was filed too late because the funds in question were added to the plan menu more than six years before, arguing that the statute of limitations had already run. The employees argued that their suit was not time-barred because plan fiduciaries have an ongoing fiduciary duty to monitor the prudence of fund choices in a retirement plan.
SUPREME COURT HOLDING: In a unanimous opinion, the Supreme Court allowed the employees to sue the plan fiduciaries. The Court observed that because a fiduciary has a continuing duty to monitor plan investments at regular intervals, the participants’ claim was not barred by the statute of limitations. The Court observed that a fiduciary’s duty of prudence in selecting an investment is separate from the duty of continuing to monitor that investment.
PLANNING POINTS: Plan fiduciaries, including administrative committees that review plan investments, have some basic duties regarding plan investments. Among these are to make prudent, diverse investment choices. In addition, fiduciaries are obligated to monitor previous investment choices on a continuing basis and remove choices that are no longer prudent.To show that it has met these requirements, a plan fiduciary is well-advised to have periodic meetings to review the investment choices of the plan, and record the empirical data it reviewed in determining whether the plan’s investment choices are and remain prudent.
One important item to consider is the expense ratio of any mutual fund in a plan and whether that ratio is reasonable. Is another class of shares in the mutual fund available at a lower cost? Is the choice of the investment itself prudent? Are plan investments as a whole diversified? Does an investment choice continue to be prudent given its performance compared to applicable benchmarks? These are questions that the fiduciary should ask, answer and document at regularly scheduled periodic reviews to meet the legal obligations discussed in Tibble v. Edison International.