Last year's unanimous 9-0 decision by the U.S. Supreme Court in Tibble v. Edison International makes it easier for retirement plan participants to sue their employers and should have been a wake up call to all plan sponsors. Why is this decision so significant? Primarily, because the plan fiduciaries of the defendant did a lot of things right in managing the Edison plan – things that many retirement plan sponsors don’t do – and still came out on the losing end.
With significant changes on the horizon to close the loopholes of conflicted advice for retirement plans, now is a very good time to reevaluate your current plan management practices to determine what's working, and what's not. (For more, see: How to Distinguish Advisors from Salespeople.)
Five Things the Defendant Did Right
- They had a plan committee. As a matter of law, every ERISA plan has one or more fiduciaries to make plan decisions intended to be in the best interests of plan participants and beneficiaries. Some employers only empower one individual to make decisions for the plan. While a committee isn’t required, ERISA mandates that all plan fiduciaries, even if it’s only one person, operate as “prudent experts” in making decisions. If the plan fiduciaries lack the expertise necessary to fulfill their duties, they must find the expertise elsewhere. Have you formed a committee to oversee your plan?
- They had regular committee meetings. Formal meetings should occur on a regular basis and the most effective fiduciaries maintain a regular governance calendar. The absence of regular meetings or a formal review process of plan activities may suggest that the plan is not properly managed or that service providers are not prudently monitored, as the law requires. The Edison committee met each quarter to review plan investments, reports and recommendations from their investment provider. Do you have regular committee meetings and use a formal process to evaluate your plan’s investments?
- They kept minutes of committee meetings. The key to substantiating procedural prudence is the ability to demonstrate “prudent process.” A written record of the activities of your plan committee is essential to document not only the results but also the decision-making process behind the deliberations. Fiduciaries should keep minutes of meetings and the minutes should provide sufficient detail of the issues considered, actions taken and the procedures that were followed. Minutes should also be supplemented with copies of any additional documentation that was reviewed or considered. Do you maintain a detailed written record of all your committee meetings?
- They had an investment policy statement. An investment policy statement (IPS) is a written statement that provides the fiduciaries of the plan with guidelines and instructions to make investment-related decisions. Although not specifically required by ERISA, the IPS is both the roadmap for investment decisions and a standard against which those decisions will likely be measured in litigation. Furthermore, DOL auditors routinely ask for a copy of the plan’s IPS in the event of an audit. Do you have an investment policy statement and reference the policy when making your investment decisions?
- They hired an investment professional to help. The Edison committee relied on the services of an outside investment advisor to review, select, and monitor its plan investment menu. And they did make occasional fund changes including the replacement of funds that decreased the revenue sharing received by the plan. Do you engage the services of a qualified advisor that helps to protect your company and management from fiduciary liability?
Lessons for Plan Sponsors
Many experts believe that the Tibble v. Edison decision will lead to further litigation in the industry. And while litigation against large retirement plans receives the media attention, small plans are also subject to legal action. The overriding lesson of this noteworthy court decision is that retirement plan fiduciaries must be proactive in carrying out their duties and stay current on facts and information that might affect the plans to which they have a duty.
Apathy is not a strategy. Set it and forget it is not an appropriate standard. Often times, whether a fiduciary has breached his or her duty is not determined by the outcome of a decision, but the process that leads to the decision, and whether the process demonstrated prudence. (For more, see: How to Solve the Retirement Equation.)
- Monitor plan investments on an ongoing basis. Plan fiduciaries have a responsibility to review the investments in their plans on an ongoing basis and determine whether to include or remove funds. This review should include which funds have revenue sharing, the amount of the revenue sharing and the costs associated with these funds. The justices in the Tibble v. Edison case expressed skepticism about the prudence of using retail class mutual funds as plan investment options when lower cost, institutional class funds are available. Are you using institutional class funds in your plan? Before including any funds in a plan, fiduciaries should ask about alternative class shares and make reasoned determinations on what share class would be in the best interests of plan participants. (For related reading, see: Pension Options: Payout vs. Payments.)
- Review and update investment policy statement. If your plan doesn’t currently have an investment policy statement, now might be a good time to put one into place. If your plan already has one, it’s probably a good time to review it and make any necessary revisions. The policy should identify the investment objectives of the plan, describe the decision-making processes for selecting investment alternatives and identify the procedures and benchmarking indexes the committee uses when assessing investment performance of the funds offered by the plan. It should be kept up to date and reviewed by the plan committee at least annually.
- Review effectiveness of any outside advisor. If you have retained an advisor, you should evaluate the effectiveness of that advisor and the nature of the services provided on a regular basis. Ideally, your plan should retain a knowledgeable and experienced advisor who can assist you with a broad array of fiduciary and non-fiduciary issues such as help with evaluating and selecting appropriate investment options and service providers, meeting ERISA compliance standards, helping employees achieve retirement readiness, and mitigating fiduciary risk. The engagement of a qualified advisor performing the appropriate services can dramatically improve the quality of your plan and simplify plan management.
All too often, plan sponsors hire a generalist or non-fiduciary broker with the mistaken belief that the responsibility and liability for investment selection and monitoring is transferred to the broker. If the advisor does not meet specific qualifications and acknowledge their fiduciary status as a 3(38) investment manager in writing, your plan fiduciaries retain full responsibility and liability for all investment decisions. Generalist/non-fiduciary brokers typically increase a plan sponsor’s liability. And while a plan sponsor cannot completely eliminate fiduciary responsibility, company and personal liability can be significantly limited through the use of ERISA safe harbors and the appointment of a qualified fiduciary advisor. (For more, see: How to Protect Your Assets From Litigation.)