Ongoing Responsibility for Retirement Plans
Another May 2015 Supreme Court decision may affect business owners. In Tibble v. Edison International (No. 13-550), the Court unanimously held that there is no statute of limitation on fiduciary responsibility for 401(k) plans.
In this case, employees of a utility company filed suit, alleging that the company had added some relatively high-fee mutual funds to the 401(k) plan’s menu of investment choices. In 1999, the plan added three funds that were sold to ordinary investors; another three similar funds were added in 2002. According to the complaint from plan participants and beneficiaries, versions of the same funds, with lower fees, were available to institutional investors, yet these versions were not in the Edison 401(k) plan. Thus, the plaintiffs said they paid higher fees than necessary, reducing investment returns.
In the Supreme Court, the case revolved around the funds added in 1999. The company said that such disputes related to employer-sponsored retirement plans have a six-year statute of limitation based on when the funds were selected for the plan. As the action was begun in 2007, the employees’ complaint regarding the funds added 8 years earlier was untimely. A district court and the Ninth Circuit generally agreed with this argument.
The Supreme Court reversed, siding with the employees. The high court found that the fiduciary of an employer retirement plan has responsibilities similar to those of a trustee: not only to exercise prudence in selecting investment options but also to continually monitor those options, removing those now deemed to be imprudent. Fiduciaries should exercise “care, skill, prudence, and diligence,” as the Court put it.
The Court further found that as long as the actions upon which the employees based their claim of a breach of this continuing duty was filed within six years of their occurrence, the employees’ claim was timely filed. Thus, the Court sent the case back to the U.S. 9th Circuit Court of Appeals to review whether the employer had breached its continuing duty of prudence within the relevant six-year period with respect to the 1999 funds. (Earlier, the district court had decided for the employees in regard to the 2002 funds, where the statute of limitation was not an issue.) Despite what may have been reported, the Supreme Court did not address the substance of the employees’ complaint about high plan fees and their impact on long-term investment returns.
Apparently, based on the Supreme Court’s holding in this case, fiduciary responsibility for investment choices in employer sponsored retirement plans lasts as long as the investment choices are offered by the plan. If you offer your employees a defined contribution plan, such as a 401(k), investment choices should be well considered, and fees should be part of that consideration. Going forward, menu options that no longer pass muster should be replaced or dropped.
Business owners who sponsor retirement plans should take heed of the Supreme Court’s message. Meet with the advisers who help with your plan to make sure investments are chosen carefully and scrutinized regularly. Get formal reports supporting those efforts, review them to see if you’re comfortable with what you read, and maintain the reports in a secure location.
You also might want to meet with an attorney familiar with securities law to get a knowledgeable opinion. Would it make sense to limit plan choices to a few low-cost stock funds and high-quality bond funds? Are there ways to reduce fiduciary responsibility by outsourcing? Ultimately, the most important question might be whether all the benefits of sponsoring a retirement plan for employees are worth the time and expense involved in reducing perpetual liability for possible missteps.