On August 16, after a nearly ten year journey through the courts, the U.S. District Court for the Central District of California reversed an earlier decision on a landmark case and ruled that plan fiduciaries continue to have responsibility for employee benefit plans (such as 401(k) plans) even after initial investment decisions have been made.
Plan fiduciaries (typically the business or business owner) will now have to spend more time and become more actively involved in the management of investments, including decision making regarding the share class of investments in the portfolio.
This presents a significant challenge to plan fiduciaries, many of whom have traditionally trusted an outside plan advisor or manager to make investment choices. The court’s ruling means that plan fiduciaries must remain more fully engaged in investment decisions in order to fulfill their fiduciary responsibilities.
The real issue is that business owners are not investment professionals, are unlikely to understand the different classes of shares, and simply do not have the time to devote to more active management of their companies’ defined benefits plans. But, as the court decision indicates, that does not relieve them of their fiduciary duty, nor does reliance on an investment advisor stop fiduciary responsibility.
By shifting more of the burden of oversight back to the plan fiduciary, the Court’s decision makes the choice of an investment advisor and third-party administrator more critical than ever. Because business owners and their financial managers are seldom well-versed in the complex world of investment management, the working relationship they establish with an outside advisor will need to become closer and more active.
Background
Earlier this year, the United States Supreme Court had reversed the District Court’s decision to dismiss the case and sent it back to be reconsidered. The U.S. Supreme Court’s decision said, in part, “Under trust law, 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 case of Tibble v. Edison International pitted members of a 401(k) against their employer, Edison International, who was the plan sponsor. The participants sued to recover what they felt were excessive funds paid to the plan manager. The managers of the 401(k) initially purchased higher cost funds (retail class), but did not switch the portfolio to a lower cost (institutional class) version of the same funds once they became available. At issue was whether or not the plan fiduciaries could be held liable for the decision to continue to keep the portfolio in the higher fee funds.
The Court ruled that plan fiduciaries do have a “continuing duty of some kind to monitor investments and remove imprudent ones,” even outside of the six-year statue of repose mandated by the Employee Retirement Income Security Act (ERISA). This means plan fiduciaries (normally employers) must actively monitor decisions being made regarding investments, even after the initial purchase decisions have been made. This decision will have far reaching implications for plan sponsors and the brokers and insurance companies who actively manage such plans.
For more information about the changes that may be forthcoming, or for help on sorting through the compliance issues of an employee benefit plan audit, please contact Gray, Gray & Gray at (781) 407-0300.