The Supreme Court released its ruling and written commentary on a landmark ERISA case, Tibble v. Edison International. Employees of Edison International accused their employer of favoring high-cost mutual funds over lower-cost options. In a 9-0 vote, the court threw out an appeals court ruling that limited the number of claims that could be made in the case due to a statute of limitations.
It is important to note, though, that the Supreme Court was not ruling on whether the expenses in the Edison International 401(k) plan were excessive; rather, the Justices weighed, and unanimously agreed, that it is an ongoing responsibilityof plan fiduciaries to monitor and document their fiduciary role and responsibilities. No period of time will absolve an organization from this responsibility.
Also see: "SCOTUS stating the obvious in Tibble ruling."
The ruling, written by Justice Breyer, said the lawsuit had been filed in a timely manner and the case will now return to the lower courts for further litigation on Edisons fiduciary duty to monitor investments. While we will wait to see the ultimate outcome, the result in the Supreme Court affirms a number of best practices that we employ on behalf of our clients and recommend for all employers and retirement plan advisers to follow:
1) Understanding fiduciary responsibilities in a legal context. It is critical for employers and their representative fiduciaries and/or retirement committee to have a clear understanding of their role. While the 408(b)2 and 404(a)5 fee disclosure requirements heightened the scrutiny around plan costs, it has long been a fiduciary requirement to understand, measure and document plan expenses. Additionally, the trend toward investment menu architecture that includes index vehicles, as well as plan cost benchmarking, have been prevalent within the industry for the last five or six years. These are just a few of the broad responsibilities that fiduciaries must follow and an annual process should be implemented to review, stay abreast and document compliance with them all.
2) Plan cost analysis and benchmarking. Employers and their fiduciaries should be carefully analyzing plan costs, at least annually. Of course it is easy to point a finger in hindsight that Edison International fiduciaries should have taken action, but this is an important lesson for all employers that they should be looking at the following:
- Total cost of plan investments;
- Total amount of revenue sharing or administrative expenses built into plan investments;
- Comparison of expenses between investments within the plan;
- Comparison of revenue sharing between investments within the plan;
- Comparison of total plan costs against national averages within your market segment;
- Comparison of total plan costs against peers.
Document this review and any action steps.
3) Investment due diligence. Many employers are (and have been) reviewing their plans investment menu with some frequency. This process should follow generally accepted investment methodology using objective criteria and applied frequently (no less than annually). In this process, employers and fiduciaries should always consider alternative investment options, determine if lower cost options of the same fund exist, and demonstrate and document why and how these choices ultimately are made.
Again, considering these trends over the last several years could help fiduciaries to ensure they are fulfilling their duty to monitor the plan. This may result in a shift toward fewer investments, index-based options, or revenue sharing equalization.
4) Engaging an expert and advocate. There is great opportunity for retirement-focused advisers to add value to companies and their plan fiduciaries. If we follow the same outcomes of the numerous excessive fee cases during the last few years, one could expect that the court will require Edison International to engage an independent fiduciary consultant to assist their plan on a go-forward basis. While it is still common to see employers in the large and jumbo markets working directly with vendors and record keepers, it would certainly be a best practice for these corporations to employ independent advisers who are experts in qualified plan fiduciary oversight and due diligence. In the small- and mid-size market, companies and organizations really need help from advisers. These best practices are core services in todays industry and certainly a way to add valuable services to each client relationship.
Employees and retirement plan participants have a right to competitive pricing. This ruling solidifies our view that fiduciaries have one of the highest responsibilities under the law and must always act in the best interest of participants and their beneficiaries, which means being vigilant in their review of the plan, its service offering, and its cost structure. As we navigate the marketplace, I am encouraged to see that most companies and their fiduciaries are active in their efforts around plan costs. Overall, we can continue to do better with ensuring participants get fair and competitive pricing across all of the investments in their plan. Its important to keep in mind though that cost isnt everything.
Assaley, AIF, is lead adviser, retirement plans, at AFS 401(k) Retirement Services. Reach him at email@example.com.
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