Attorneys who represent defined contribution plan sponsors and DC plan consultants say the U.S. Supreme Court’s recent decision in Tibble et al. vs. Edison International has created uncertainty for plan executives.
While the court’s unanimous ruling reaffirmed and clarified what plan executives should have been doing all along — continuously monitoring investments — it didn’t establish guidelines for that monitoring, they said.
The court sent the case back to a federal appeals court to outline standards. “We express no view on the scope of (Edison’s) fiduciary duty in this case,” the court said in its 9-0 decision issued May 18.
“The court is continuing to make it unclear what fiduciaries are supposed to do,” said Jeremy Blumenfeld, a Philadelphia-based partner at Morgan Lewis & Bockius LLP. “If the fiduciaries had specific guidelines, they would do it.”
Other attorneys said the decision highlights that fiduciaries’ inconsistent monitoring and inadequate record keeping are a prescription for trouble.
“Amateur hour is over,” said James P. McElligott Jr., a Richmond, Va.-based partner for McGuire Woods LLP.
“The court is saying you need to look at investments in a serious way,” he added. “Investment committees need to know their investments. You need some strong, competent independent advisers. You need documentation.”
Mr. McElligott said the need for action is heightened by the ruling that fiduciaries’ responsibilities aren’t restricted by an ERISA six-year statute of limitations for suits alleging breach of fiduciary duty. “You can’t set it and forget it,” he said.
The Supreme Court has told fiduciaries “to take seriously their responsibility in time and in effort,” said Nancy Ross, a Chicago-based partner for Mayer Brown LLP. “For some plans, that’s a wake-up call. For others, it’s a reminder.”
Ms. Ross said the decision could encourage more fiduciary-breach lawsuits. “The plaintiffs’ bar could see this as a back-door entry to challenge plan operations,” she said.
Although the Tibble case focused on fees for plan options, “prudent fiduciaries will look at the instructions by the court as meaning more than a duty to monitor investments,” she said. “Smaller plans will be the most affected. They may have to start from scratch to make sure they document their (monitoring) process. Larger plans will have to fine-tune the process.”
Mr. Blumenfeld said he wasn’t sure whether the court’s ruling would lead to more lawsuits, but noted it could lead to higher damages assessed through verdicts or settlements and higher plan costs due to litigation expenses.
The Tibble case started in August 2007 with a class-action lawsuit filed by 401(k) participants against Edison International Inc., Rosemead, Calif., a utility holding company, and others associated with the Edison plan. The suit was filed in the U.S District Court for the Central District of California.
The participants alleged plan executives violated their fiduciary duty when they chose retail shares for mutual funds over lower-priced shares for the same investments. They challenged six mutual funds — three that were added to the plan lineup in 1999 and three that were offered beginning in 2002.
The District Court in 2009 dismissed the claim for the 1999 funds, citing the six-year statute of limitations for filing a fiduciary breach claim that is part of the Employee Retirement Income Security Act.
However, after a trial, the court in 2010 ruled in favor of the participants regarding the 2002 mutual funds, awarding them $370,732 in damages. The participants appealed the ruling on the 1999 funds, and the 9th U.S. Circuit Court of Appeals upheld the decision in 2013. Participants then petitioned the Supreme Court.
The appeals court mistakenly applied the six-year statute of limitations to the three 1999 funds “based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty,” said the opinion written by Justice Stephen Breyer. “The 9th Circuit did not recognize that under trust law, a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.”
The Supreme Court vacated the appellate court’s ruling and sent the case back “for further proceedings consistent with this opinion,” wrote Mr. Breyer.
Non-binding in other circuits
If the appeals court offers guidelines, its decision will affect only ERISA-covered DC plans in the 9th Circuit’s area — California, Nevada, Alaska, Hawaii, Idaho, Washington, Oregon, Montana and Arizona. “It won’t be binding on other circuits,” said Ms. Ross of Mayer Brown, “but it will be persuasive in other circuits.”
If the appeals court sends the case back to the District Court where the Edison ruling originated, ERISA attorneys said litigation might go on for several more years unless there is a settlement.
Attorneys and consultants said fiduciaries shouldn’t wait for follow-up litigation, maintaining that an ounce of fiduciary prevention can protect against a pound of litigation.
“Fiduciaries will be more cautious about minutes of fiduciary meetings to reflect both thorough deliberation and their decisions,” said Ms. Ross.
“Know your plan documents — and read them periodically,” added Mr. McElligott of McGuireWoods.
“My initial takeaway is that the court confirmed a process that we have been doing with clients for a long time,” said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader for Callan Associates Inc., referring to her firm’s practices.
Monitoring covers regular appraisals of fees, fund performance, risk, style drift and “organizational stability” — whether fund managers leave — on a quarterly basis, she said.
“Our answer to the court’s decision is (for plan executives) to conduct a plan fee review with a request for information from comparable vendors every few years to benchmark fees,” she said. They should perform “interim benchmarking annually, or if there is a major plan change.”
Ms. Lucas conceded that lower-court interpretations of the Supreme Court ruling remain a wild card for plan management. “The 9th Circuit still needs to say what is adequate,” she said. “But it’s hard to say things will be resolved even when the 9th Circuit makes its ruling. This area remains unsettled.”
Consultants say the best defense in ERISA legal challenges is documenting the process for their decisions. “In a general sense, if fiduciaries followed the right process, courts are hesitant to second-guess them,” said Michael Weddell, a Southfield, Mich.-based senior consultant for Towers Watson & Co.’s benefits advisory and compliance unit.
Michael Webb, New York-based vice president, retirement, at Cammack Retirement Group, an investment and employee benefits consulting firm, emphasized the need for keeping good records.
“We say (to clients) keep doing what you are doing — monitor investments, go for the least expensive asset classes and get rid of poor-performing funds,” said Mr. Webb.
Source: Pensions & Investments