Published in the NH Society of Certified Public Accountants' Connection Newsletter (fall 2015)
On May 18, 2015, the United States Supreme Court ruled unanimously in Tibble v. Edison International that retirement plan fiduciaries have an ongoing duty to monitor plan investments. The ruling came in a case involving several challenges to retirement plan investment decisions made more than six years before suit was filed which the lower courts had ruled was barred by the statute of limitations. Although not unexpected, the decision reaffirms that retirement plan fiduciaries must have a vigorous investment monitoring program in place to meet their responsibilities under the Employee Retirement Income Security Act of 1974, as amended, (“ERISA”). Although not subject to ERISA, fiduciaries of governmental plans have similar responsibilities under state law. Tibble illustrates that even when employers use outside consultants to help them oversee retirement plans, they can still face liability associated with their retirement plans.
In a 2007 lawsuit, participants in the Edison 401(k) Savings Plan sued various Edison International entities and the plan fiduciaries alleging numerous ERISA claims. The claims included that the plan fiduciaries should have offered identical lower-cost institutional shares instead of the more expensive investment options selected in 1999 and 2002. The plaintiffs argued that losses were suffered because the inclusion of the higher priced funds resulted in greater expenses that lowered potential returns. The 2007 lawsuit was one of several largely unsuccessful lawsuits brought on behalf of retirement plan participants by plaintiffs’ law firms against major corporate retirement plans. In Tibble, the lower courts ruled that the Plan fiduciaries had violated ERISA’s duty of prudence by failing to investigate the possibility of offering the institutional share class funds with lower fees. Although the expense ratios of the mutual funds selected were in line with expected ratios for a plan of its size, the lower courts held that the defendants had failed to undertake the procedural prudence required by ERISA. Edison had argued that it based its decision to offer the retail-class funds on advice from its investment consultant Hewitt. The Court rejected this argument, stating that independent expert advice does not absolve a fiduciary of responsibility and that there was no evidence in the record that Edison ever considered the possibility of using the institutional class.
Although ruling in favor of the plaintiffs, the lower courts limited the damages to only claims based on the 2002 investments. All claims relating to the 1999 investments were statutorily barred by the ERISA Section 413 six year limitations period as the lower courts found that there had not been any change in circumstances that would trigger an obligation to conduct a full due diligence review of the 1999 funds within the 6-year statutory period.
The Supreme Court reversed the lower courts’ ruling that ERISA’s six-year limitations period barred plaintiff’s claims that the 1999 mutual fund investments were imprudent. Although the Supreme Court stated that the lower courts correctly asked whether the last action which constituted a part of the breach or violation of the duty of prudence occurred within the relevant 6-year period, the lower court was incorrect to focus on the act of designating an investment for inclusion in the plan to start the six year period. Instead, the lower courts should have recognized that a fiduciary is required to conduct a regular review of its investments with the nature and timing of the review contingent on the circumstances.
Although sending the case back to the lower courts to decide whether or not Edison and the fiduciaries had breached their fiduciary duty in connection with the 1999 investments, the Supreme Court ruled that ERISA imposes an ongoing duty to monitor investments and remove imprudent ones. The continuing duty exists separate and apart from the duty to exercise prudence in selecting investments at the outset of inclusion in the plan. The Court stated that a fiduciary should not assume that investments that were legal and proper for retention when purchased remain so indefinitely. In light of the continuing duty to monitor investments and remove imprudent ones, so long as the alleged breach of the continuing duty occurs within six years of suit, a plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones. Such a case could be filed years after the date the investments were added to the plan.
In light of the Supreme Court’s ruling, employers and fiduciaries should not assume that a detailed review of plan investments upon the initial inclusion will suffice to protect against liability indefinitely. This would be the case regardless if the review is done by the employer, a committee or by an outside consultant that has assumed some level of fiduciary responsibility. Following the initial investment selection, fiduciaries must constantly monitor whether or not the initial investment decisions remain prudent ones.
Fiduciaries should establish written procedures for the periodic monitoring of all plan investments and have a written investment policy statement to set forth review criteria. If the employer delegates authority for the oversight to a committee, the delegation needs to be documented in writing. The committee should consider whether to adopt a committee charter or bylaws to formalize committee operation. In order to prove that monitoring activities are ongoing, written records of all monitoring activities should be created and retained indefinitely in case a claim is brought by participants. In the event that the plan is audited by the United States Department of Labor, the auditor will ask for records of investment monitoring.
Employers frequently engage financial professionals to assist them with their investment reviews and to provide investment support. Employers often assume that retaining an investment professional, either as a so-called ERISA 3(21) or a 3(38) fiduciary, will completely remove any responsibility for retirement plan oversight. Employers also assume that should any liability result, the financial professional and his or her firm will be responsible. Neither is a correct assumption. Even if the professional assumes fiduciary responsibility pursuant to a written contract, the employer still must select the 3(21) or 3(38) fiduciary using a prudent process and must monitor the performance of the financial professional. In addition, in most cases the contract between the employer and the financial professional will require the employer to indemnify the financial professional for any liability that could result, including the cost of defending the financial professional in any lawsuit arising out of the services to the retirement plan. As a result, when financial professionals are engaged to assist with retirement plan investment reviews, employers would be well advised to have ERISA counsel review the contract so that the employer understand exactly the scope of the services being performed and the degree of responsibility being assumed by the financial professional.
In summary, the Tibble decision has confirmed that retirement plan fiduciaries must have an investment monitoring program in place providing for the periodic review of all plan investments. Tibble also confirms that employers need to engage in an active fiduciary process even if outside independent professionals are retained to assist with plan investments since independent investment advice will not protect a fiduciary in all instances.
John E. Rich, Jr. is a Director at McLane Middleton, Professional Association who specializes in employee benefits, pension, ERISA and tax-related matters. He can be contacted directly at (603) 628-1438, or by email at [email protected].