Lessons for advisers from Supreme Court's decision on 401(k) excessive fees lawsuit

A few suggestions for retirement plan advisers who want to protect their clients and themselves as 401(k)s face legal and regulatory scrutiny

May 20, 2015 @ 4:53 pm

By Darla Mercado

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The U.S. Supreme Court just had its say on a key 401(k) excessive fees lawsuit, paving the way for retirement plan advisers to step up their game when it comes to client service and compliance with ERISA.

Readers following InvestmentNews' coverage of the retirement plans industry probably heard about Tibble v. Edison International, a lawsuit originally filed in 2007 by Edison's retirement plan participants against the company. At heart, the suit focused on six retail share class funds that were more expensive than institutional share class funds.

In 2010, the U.S. District Court for the Central District of California ruled in favor of the plaintiffs and gave them a judgment of $370,732 for damages related to three of the costly funds. The legal battle continued over the three other funds and eventually reached the highest court in the land. That dispute centered on whether the six-year statute of limitations on fiduciary breach protects the plan's fiduciaries from keeping imprudent investments if the funds were added more than six years ago.

In this case, 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.”

SUGGESTIONS FOR ADVISERS

What might this mean for advisers? ERISA experts Marcia Wagner, managing director of The Wagner Law Group, and Jason C. Roberts, CEO of the Pension Resource Institute, have a few suggestions for retirement plan advisers who want to protect their clients and themselves at a time when 401(k)s are facing legal and regulatory scrutiny.

Understand the Employee Retirement Income Security Act of 1974. In the past, advisers were able to go about their business with retirement plans and only know about the investments that go into the menu. Nowadays, with the Labor Department releasing its fiduciary proposal and with plaintiffs' attorneys scoring wins for employees, “advisers have to be mini ERISA lawyers,” Ms. Wagner said. “They have to understand not just how you invest and what's prudent, but they have to understand the law, the terminology and the statute of limitations.”

Find some of the basics on qualified retirement plans here. Ms. Wagner also suggested reaching out to state bar associations to brush up on the basics of ERISA.

Clearly define your role and duties as the plan adviser. Plan sponsors and advisers need to find a common ground on who's responsible for what. Mr. Roberts recommends that advisers discuss and document their role as assisting plan fiduciaries in understanding fee allocation methods. Make sure you, as the adviser, also document that you don't have discretion over these decisions.

Mr. Roberts also noted that advisers should have the plan fiduciaries instruct them in writing on any revenue sharing preferences that could limit the pool of funds that the adviser can select or recommend. Specificity is key.

“Make sure that your advisory agreement properly describes your investment-related services as monitoring and/or recommending investments within the universe predetermined by the fiduciaries to be appropriate,” he said.

Keep in touch with your plan sponsor clients and document everything. Advisers can't just set-and-forget their plan clients once they've set up the 401(k). Be sure to follow-up regularly. “Plan advisers need to be abreast of developments and provide outreach to plan sponsor clients on what they need to do to ensure continuing monitoring,” Ms. Wagner said.

That also means plan advisers need to document every step of their due diligence and share it with the plan sponsor. “Put everything in writing,” Ms. Wagner said. “If it's not in writing, it didn't happen.”

Are you taking on a new plan? Make sure you review the fee allocation policies and plan investments before you onboard that new plan client, Mr. Roberts warned.

Bring plan sponsors up to speed on processes. Advisers can work with plan fiduciaries to implement a process for allocating the plan's expenses and confirm that this method adheres to the plan document and is reasonable, Mr. Roberts said.

Other ways for advisers to help out include aiding plan fiduciaries in selecting the share classes that pay a revenue share that's reflective of the services provided, he added. Advisers can also bring committee members up to speed on their fiduciary duties to monitor and remove investments that are imprudent.

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