Fiduciary Corner

Blaine F. Aikin

Ramifications of Supreme Court decision on 401(k) fee lawsuit run deep

The court underscored the critical importance that persons entrusted with the assets of others cannot simply make the initial investment decision and walk away

Jun 1, 2015 @ 10:43 am

By Blaine F. Aikin

It's official. Fiduciaries have an ongoing duty to monitor. On May 18, the U.S. Supreme Court confirmed in Tibble v. Edison International that under the common law of trusts, ERISA fiduciaries have an ongoing duty to continuously monitor 401(k) plan investment options and, if necessary, remove imprudent ones. The court underscored the critical importance, developed over the centuries under common law, that persons entrusted with the assets of others cannot simply make the initial investment decision and walk away.

This was a narrowly-focused, unanimous decision affirming a long-standing fiduciary duty. It was almost universally anticipated to come down in favor of the plaintiffs. Why, then, is Tibble being treated as big news? A partial reason is that decisions of two lower courts were overturned in the process. But more importantly, the case has sharply focused the attention of plan fiduciaries on the facts that fiduciary breaches can have big consequences and that monitoring is inextricably connected to many other fiduciary duties.

PRIMARY QUESTION

Without getting into the procedural details of Tibble, which was filed in 2007, the primary question before the high court was whether the initial decision by Edison fiduciaries in 1999 to select retail share classes of three mutual funds as investment options, instead of lower-cost institutional shares, was time-barred from breach claims under ERISA's six-year statute of limitations.

The employees asserted that Edison had a continuing duty to monitor investments beyond the statutory deadline. The 9th Circuit Court of Appeals disagreed, eventually leading to the appeal.

Ultimately, the Supreme Court sided with the plaintiffs: ERISA's strict duty of prudence requires 401(k) plan fiduciaries not only to prudently select investment options, but to continue to monitor to ensure all held investments remain prudent, even after the six-year deadline for breaches involving the original decision.

According to the opinion written by Justice Stephen Breyer, the lower courts erred by focusing on the six-year limit for fiduciary breach claims "without considering the nature of the fiduciary duty" and its broad contours. "We have often noted," Mr. Breyer wrote, "that an ERISA fiduciary's duty is 'derived from the common law of trusts.'" As such, he wrote, "a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee's duty to exercise prudence in selecting investments at the outset."

The lingering question that the court did not address is the scope of the duty to monitor. These details were remanded to the 9th Circuit for final adjudication. However, the court offered guidance, noting that the trustee must "systematically consider all the investments … at regular intervals," and when assets are found to be inappropriate, "to dispose of them within a reasonable time."

FIDUCIARY RESPONSIBILITIES

But the ramifications of this decision run even deeper. Consider the following fiduciary responsibilities that are relevant to this case, even though they were left unsaid in the narrow scope of the high court's review.

It is imprudent to waste money. It is virtually indefensible for a plan to elect to use retail mutual fund shares involving much higher costs than readily available institutional class shares of the same fund.

The costs of poor decisions compound over time. This is true in terms of the damage done to investors through unnecessarily high fees. It is also true in terms of the damages and penalties plan fiduciaries may bear as a result of litigation.

Having a well-articulated investment policy statement is important. Some were disappointed that the Supreme Court's decision didn't prescribe the frequency and due diligence criteria to be used in the monitoring process. The court wisely recognized that both the frequency and nature of oversight activities can and should vary based upon facts and circumstances of the plan and the portfolio. These things are better left unsaid by the court but are expected to be addressed in the investment policy statement.

The monitoring process is also important and it neither starts nor stops with investments. Service provider relationships must be closely monitored, as well, among many other aspects of plan governance.

Documentation is crucial. When the Tibble case returns to the district court for adjudication, the court will be searching for evidence of procedural prudence on the part of plan fiduciaries. The extent and magnitude of culpability will hinge in large part on the quality of governing documents and minutes of investment committee meetings demonstrating adherence to those documents and fiduciary principles.

A fiduciary must act with the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use. Tibble should serve as a cautionary tale for fiduciaries to take the time to understand their obligations and to exercise vigilance in meeting them.

Blaine F. Aikin is president and chief executive of fi360 Inc.

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