Tools exist for those concerned about oversight shortcomings
The U.S. Supreme Court's decision in Glenn Tibble et al. vs. Edison International et al. could lead sponsors of defined contribution plans to take extreme actions ranging from cutting back on investment fund options to abandoning plans altogether to avoid litigation risk. Both extremes would be a mistake.
Plan executives might think the Tibble decision should lead them to offer participants fewer fund choices because the addition of each fund increases risk. Those so tempted should be reminded that prudent fund selection criteria must reflect the need to offer a broad range of investment options that afford participants the opportunities to meet differing risk and return objectives and to diversify their investments so as to minimize the risk of large losses. While the total number of required funds is not regulated, if funds are withdrawn from the investment menu, those remaining will be judged by these criteria.
For those for whom the Tibble decision engenders a feeling of fiduciary fatigue, there are few prudent options. Abandoning the DC plan is probably not a good business decision in the face of competitive pressure to attract and retain talent.
Further, sponsors shouldn't take away from Tibble the idea that plan fiduciaries can't rely on investment consultants and must perform their own investigation for monitoring purposes simply because the district and appellate courts found that Edison International was not thorough enough in reviewing its consultant's recommendations and could not therefore rely upon them. In finding that Edison could not rely on its consultant without Edison's own investigation, the appellate court also placed reliance on another finding that Edison's consultant was not acting in a fiduciary capacity.
While plan fiduciaries must demonstrate that their reliance on a consultant is reasonable, had Edison's consultant been appointed in a fiduciary capacity and been appropriately qualified as an expert, the litigation might have taken a different turn.
The better takeaway from this decision is that plan sponsors should hire only consultants whom they qualify as experts and who accept fiduciary responsibility for their advice. In fact, to do otherwise would likely be imprudent.
If as a response to the Tibble decision a plan executive resorts to delegating or outsourcing fiduciary responsibility to an investment manager, such delegation breeds its own set of fiduciary issues and the investment committee must still conduct prudent oversight.
Accordingly, sponsors of DC plans shouldn't read more meaning into the Supreme Court's decision beyond its simple holding of a continuing fiduciary standard of care in a 401(k) plan, after the initial selection, to monitor investment options and remove imprudent funds.
Attorneys have suggested the decision has created uncertainty for plan executives. But that concern is unsupported by any definition as to what fiduciary duty entails.
As I argued in an amicus brief* filed with the Supreme Court on behalf of the Tibble plan participants, many plan sponsors have long been employing monitoring procedures that accord with prudent practices and a fiduciary standard of care. Such practices are well established. To the numerous consultants and their retirement plan clients who conform to such practices, there is no doubt as to the elements of the duty to monitor.
The Supreme Court's failure to define the duty to monitor might lead some plan executives to conclude the decision will encourage new and separate claims for failing to monitor service providers, revenue sharing or conflicts of interest, for example, as if extending the monitoring duty to such matters was such a novel extension of the Tibble decision.
But from the perspective of prudent practice, no one would suggest that the duty to monitor is limited to investment performance or investment fees.
Monitoring is always about looking backward and analyzing what you did before within the entirety of the investment process, allowing you to make improvements and to correct prior mistakes.
According to prudent practice, monitoring should be performed with the frequency that the circumstances require, and a plan sponsor with the help of a fiduciary-qualified investment consultant will be able to establish appropriate scheduling intervals, recognizing that plans of different size and complexity have different needs. Of course, not everything needs to be reviewed quarterly, but not reviewing annually how effectively the plan fiduciaries are meeting their fiduciary responsibilities would be a departure from prudent practice and would increase the prospects of something important being missed.
The Supreme Court has remanded Tibble for further proceedings in the U.S. District Court as to whether the duty to monitor has been breached in the case and, if so, by virtue of what act or omission. Plan sponsors who are satisfied that they conform to prudent monitoring practices should stay the course. For those with concerns as to their monitoring shortcomings, the tools already exist to conform their oversight to prudent practices and mitigate any perceived risk of litigation. n
Roger L. Levy is CEO, Cambridge Fiduciary Services LLC, Scottsdale, Ariz.
*Mr. Levy's amicus brief can be found at http://tinyurl.com/levy-brief.
This article originally appeared in the July 27, 2015 print issue as, "Plan sponsors must face up to Tibble ruling".