On May 18, 2015, the U.S. Supreme Court held that retirement plan fiduciaries have a continuing duty to monitor the investment options made available to participants under ERISA-governed defined contribution retirement plans, such as 401(k) plans and many 403(b) plans. The Supreme Court's decision serves as a reminder to retirement plan sponsors of the importance of good plan governance.
Tibble, 2015 WL 2340845, involved a lawsuit by 401(k) plan (Plan) participants alleging a breach of fiduciary duty on the basis that the Plan's fiduciaries added to the Plan's investment options retail class mutual funds instead of available lower-cost institutional class funds on two occasions. The Ninth Circuit Court of Appeals dismissed the lawsuit with respect to the earlier occasion on the basis that the funds were added to the menu more than six years before the lawsuit was filed, which is the general statute of limitations for ERISA fiduciary duty breach claims. Finding that there was not a sufficient change in circumstances to have obligated the fiduciaries to revisit their earlier selection of the retail class funds, the Ninth Circuit found that the statute of limitations barred that portion of the plaintiffs' claims.
The Supreme Court reversed, holding that there was an ongoing fiduciary duty to monitor the investment options made available under the Plan, even without any specific, significant change in circumstances. Accordingly, the Supreme Court found that the claims were not barred by the statute of limitations because the alleged failure to monitor occurred within six years before the lawsuit was filed.
Implications for Plan Sponsors
While the Supreme Court did not provide substantive guidance on the steps a fiduciary must take to monitor plan investments, the decision nonetheless raises the stakes for plan sponsors because it focuses attention on the issue of retirement plan governance, and places a continuing burden on plan fiduciaries to ensure that the investment options, and other aspects of plan operations, such as recordkeeping fees, remain prudent.
From a plan sponsor's perspective, the following should be considered:
- Who are the responsible plan fiduciaries? In the absence of a formal plan governance structure, the identity of the responsible plan fiduciaries is often unclear. They could include members of the Board of Directors, senior executives, human resource employees, and/or others within the organization.
- Is there adequate formality to plan oversight? It is important for the responsible plan fiduciaries to be aware of their responsibilities and have a set structure within which to discharge them. Often, a retirement plan oversight committee is optimal. A retirement plan committee charter can provide rules for establishing committee membership, address the frequency and formality of meetings, and provide a means for periodic reporting to the Board of Directors. It is also important to have an investment policy statement to provide objective guidelines for fund selection, monitoring, and replacement.
- Are the fiduciaries' activities and decisions being properly documented? The responsible plan fiduciaries should appropriately document their governance activities and reasons for key decisions through committee minutes and written unanimous consents for decisions made outside of formal meetings. In particular, fiduciaries should document their reasons for the initial selection of each investment option, and their assessments and decisions following periodic reviews of the options available under the plan. Plan fiduciaries, including the investment committee, should make sure their actions are consistent with the investment policy statement and plan document.
- Are appropriate outside resources being utilized for plan oversight? For many plans, it is appropriate for the responsible plan fiduciaries to engage an outside investment advisor. Legal counsel can advise on an appropriate governance structure, assist with documentation, and provide ongoing advice on discrete fiduciary issues as they arise.
- Is there appropriate fiduciary liability insurance? In most cases, ERISA fiduciary liability insurance can be obtained at a reasonable price and is a worthwhile investment.
The members of the Venable Employee Benefits and Executive Compensation Practice Group routinely advise clients on fiduciary matters relating to retirement plans, and would be happy to discuss any questions or concerns relating to your plan.