The recent unanimous decision by the Supreme Court in Tibble vs. Edison International has been called a game changer for retirement plan sponsors and for the financial advisors they utilize for advice. The case centered around the utility’s decision to offer the more expensive retail share classes of three funds in its 401(k) plan and the decision to continue to do so many years later. The Supreme Court overturned rulings made by lower courts that the plan sponsor’s liability had passed a six year statute of limitations. They essentially asserted that plan sponsors, and by default their investment advisors, have an ongoing duty to monitor the investment options offered to participants.

Retail vs. Institutional

The movement towards offering the best share classes available in 401(k) plans has accelerated in recent years with the new reporting requirements for plan sponsors to their participants regarding plan investment costs. Frankly, there is no excuse not to offer the lowest cost share class available to a given plan other than the need for advisors or other service providers to be compensated. (For more, see: 401(k) Risks Advisors Should Know About.)

Certainly not every 401(k) plan has access to institutional shares. Some funds may not even offer them. However many funds offer multiple share classes where often the difference lies in the expense ratio. Included in the expense ratio are 12b-1 fees and other forms of revenue sharing that might be offered. Advisors who bury their fees in the plan costs paid by participants may want to rethink their compensation structure and perhaps look to move to a more transparent method such as fixed fees.

The Advisor’s Role

An investment advisor's role in a plan is a fiduciary. Most advisors serve as co-fiduciaries in that they provide advice to the plan sponsor’s investment committee with the sponsor making the final decisions regarding investment changes, provider changes and the like. As a co-fiduciary advisors have an obligation to ensure that they make the plan sponsor aware as to whether the plan offers the lowest cost share class of a given fund available to the plan. Factors might include the size of the plan, average account balance per participant and other factors. Cost can also be a factor in the decision to terminate a fund in favor of a lower cost option within the same asset class. (For more, see: What the DoL’s Fiduciary Policy Means for Advisors.)

Process, Process, Process

The financial advisor should help the plan sponsor to institute a process to run the plan. In fact, having an ongoing process to monitor the plan’s investments and related issues would seem to be at the heart of this ruling. A documented process for managing the plan and following that process has long been touted as one of the top things a plan sponsor can do to mitigate their fiduciary liability. Instituting and managing this process is a key reason why sponsors hire an advisor in the first place. (For more, see: Meeting Your Fiduciary Responsibility.)

An Investment Policy Statement (IPS) that serves as a business plan for the plan is a vital first step. The IPS should specify items such as:

  • The plan’s overall investment philosophy and objectives.
  • Who is responsible for selecting and monitoring the plan’s investments.
  • The asset classes that will be offered and why those asset classes were selected.
  • The process and criteria for monitoring the investments offered by the plan including the criteria that would result in the replacement of an investment option.
  • The frequency of formal plan reviews and investment committee meetings.

Duty to Monitor

The crux of the Supreme Court decision is that plan sponsors have an ongoing duty to monitor investment options offered to plan participants regardless of how long the options have been included in the plan. At the very least this underscores the value of a financial advisor who is experienced in working with 401(k) plan sponsors. (For more, see: New 2015 Contribution Limits: Advisors Take Heed.)

Those plan sponsors who have not yet engaged the services of an investment consultant should certainly be motivated to do so in the wake of this decision and the Department of Labor's (DOL) emphasis on transparency and disclosure for plans. Plan sponsors would rather spend their time doing what they do best, running their company or their professional practice. While the benefits departments of larger organizations may have the in-house expertise, many smaller and mid-sized organizations do not and the services of a qualified advisor to retirement plans is especially vital to them.

Monitoring Service Providers

In addition to monitoring investment performance and expenses it is the responsibility of the plan sponsor to monitor the quality and costs of all service providers such as the plan administrator, the custodian or the bundled provider platform if the plan uses one. (For more, see: Ways to Cut 401(k) Expenses.)

A knowledgeable advisor can be instrumental in assisting the plan sponsor in performing this due diligence and in conducting a search for a replacement if needed. In fact many investment consultants to retirement plans routinely prepare requests for proposals (RFPs) for their plan sponsor clients in connection with these provider searches as needed. Additionally, a knowledgeable advisor will have the capability to benchmark these service providers and help the plan sponsor seek cost reductions. These might take the form of moving the plan to lower cost share classes or perhaps in asking for reductions in the amount of revenue sharing that accrues to the plan provider.

Advisor vs. Sales Person

Many brokers and registered reps will sell 401(k) plans offered by insurance companies or brokers. While they do generally offer services to the plan sponsors these reps often do not serve in a fiduciary capacity. The recent Supreme Court decision underscores the need for plans sponsors to engage with advisors who truly provide advice and who can help them meet their fiduciary obligations to their employees. (For more, see: How to Include ETFs in a Client's 401(k).)

Opportunity for Advisors

Financial advisors who serve 401(k) plan sponsors should see even more demand for their services as the pressure to offer top-notch, low cost investment choices to plan participants increases in the wake of this decision and others. This is not, however, an area for dabblers. If you are looking to enter this arena it is best to be sure that you know what you are doing.

The Bottom Line

The recent unanimous Supreme Court ruling in Tibble vs. Edison underscores the responsibilities of 401(k) plan sponsors to monitor the investment choices offered in their organization’s retirement plan. This responsibility is generally one that is met with the help of a qualified financial advisor to the plan. (For more, see: The Impact of 401(k) Outflows on Advisors.)

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