On May 18th, 2015 the U.S. Supreme court issued a ruling that broadened the responsibility of 401(k) plan sponsors to monitor the investments they have made available to plan participants, continuing a trend of increased scrutiny on 401(k) plan fiduciaries. The court ruled unanimously in the case of Tibble et al. v. Edison International et al., determining that plan fiduciaries are responsible for ongoing investment due diligence rather than only at the time the investment is selected.
Beginning in 1999, Edison International, a southern California Energy holding company, selected a series of retail-class mutual funds for participants to invest in, despite the fact that a nearly identical class of lower-cost Institutional funds could have been offered given their asset size and plan metrics. The group of current and former employees sued Edison International, arguing that the Edison plan sponsors breached their fiduciary duty by failing to offer the lower-cost funds.
Historically, plan sponsors had only been held responsible for exercising prudence in the initial selection of plan investments for participants. With the court’s new ruling, however, that duty of prudence will now extend to ongoing investment due diligence, mandating that that plan sponsors must “systematically consider all the investments of the trust at regular intervals to ensure that they are appropriate.”
One key item to note is that while Edison likely could have made institutional funds available to participants at the time of the lawsuit, the non-institutional funds may have been appropriate at the time they were selected. The court ruled that Edison failed to monitor their investments on an ongoing basis, but did not comment on whether or not the funds should have been selected to begin with. There is no universal rule in determining which version of a fund should be used. Rather, it depends on many factors including: the assets in the plan, number of participants, the 401(k) provider, and the employer’s decision over whether administrative costs are borne by the employer or the plan participants. These are all items that should be considered by plan fiduciaries in making ongoing investment decisions that are in the best interest of the participants in their company’s retirement plan.
Many plan sponsors will likely need to review their procedures for the selection, monitoring, and removal of funds to ensure that they include investments with reasonable fees, and if not, “dispose of them within a reasonable time,” as stated by the court. The new ruling may also open the door for future litigation against employers by their employees for breach of fiduciary duty, as well as serve to bolster the arguments of plan participants in current lawsuits.
The court did not give additional guidance on how investments in the plan should be monitored, or to what extent fees may be considered “unreasonable.” However, current plan sponsors should continue to monitor the funds they offer in accordance with their current Investment Policy Statement, paying specific attention to the fees and performance of the funds against their respective benchmarks. This could also include negotiations with the plan’s 401(k) recordkeeper and fund providers to ensure that the plan’s fees are fair and reasonable for plan participants.
The ABD Retirement Team is happy to discuss how this ruling impacts your company. Please contact us at 415-508-3367.