ERISA Fiduciaries Must Continuously Monitor Plan Investments
Author: Marta Moakley, XpertHR Legal Editor
May 21, 2015
The US Supreme Court has confirmed that plan fiduciaries have a continuing obligation to monitor investments in a plan under § 401(k) of the Internal Revenue Code (IRC). In a unanimous decision in Tibble v. Edison International, the Court held that the Employee Retirement Income Security Act of 1974 (ERISA) requires that a plan fiduciary exercise prudence not only in selecting plan investments at the outset, but also in monitoring those investments. Employers who maintain 401(k) plans should continuously monitor mutual funds for excessive fees - especially when a lower-cost institutional fee is available.
ERISA plan beneficiaries must file a complaint alleging a breach of fiduciary duty within six years of the breach, whether the breach occurred as a result of action or inaction. ERISA's § 1113 clarifies that this six-year statute of limitations applies to "the date of the last action" that constituted a breach or "in the case of an omission the latest date on which the fiduciary could have cured the breach or violation."
In Tibble, plan beneficiaries of the employer's 401(k) plan - a defined-contribution plan - filed a case alleging breach of fiduciary duty based on the choice to offer certain mutual funds that had significantly higher administrative costs when lower-cost options were available. However, the initial decision to offer some of the mutual funds referenced in the complaint had occurred more than six years before the case was filed. The plan beneficiaries maintained that the allegations were timely because the fiduciaries should have undertaken a full due-diligence review of these offerings due to the funds' significant changes within the six-year limitations period.
The lower courts denied the plan beneficiaries' claims. The Ninth Circuit Court of Appeals held that ERISA bars any claims based on funds that were first offered more than six years before the case was filed and rejected any existence of a continuing fiduciary obligation absent a significant change in circumstances.
The Supreme Court reversed, explaining that "under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee's duty to exercise prudence in selecting investments at the outset."
However, the Supreme Court declined to define the scope of this continuing duty, leaving that task to the Ninth Circuit.
José M. Jara, Principal and National Practice Leader Multiemployer Plans for Buck Consultants, LLC, stresses the compliance challenges for fiduciaries in this area of the law. "Complying with ERISA is no easy task given the complexity of the statute and the fact that the law continues to develop at a rapid pace as a result of a number of factors," Jara explains. "A fiduciary's task is made that much more difficult given that the issue of whether a person has breached his or her fiduciary duties is extremely fact-intensive and may vary depending on the particular Circuit within which a lawsuit is brought."
While the courts continue to define the nature of a fiduciary's continuing duty to monitor investments, Jara encourages fiduciaries to take concrete steps to minimize liability risks. Jara advises plan sponsors and fiduciaries to take the following actions:
- If the fiduciaries have adopted an investment policy statement (IPS), now is a good time to review the IPS and whether it is current to reflect the plan's objectives.
- If the plan does not have an IPS, one should be adopted.
- The IPS should incorporate a process that requires investments to be examined for appropriate factors such as the risk of loss, the opportunity for return, diversification, liquidity, current return and projected return.
- At a minimum, an annual review of the investment line-up and whether it meets the guidelines prescribed by the IPS should be conducted. This review should be a collaboration between the fiduciaries and the plan's advisors.
- Of course, if a special "change in circumstance" arises, a review of the funds would be warranted at that time.
- Based on the Tibble case and with the US Department of Labor regulations on fees being out for some time now, particular attention should be given to the fees being charged by the funds.