While it has always been important for defined contribution plan fiduciaries to have an established fee philosophy for their plan and thorough documentation of decisions, these issues have returned to the spotlight following the U.S. Supreme Court's ruling in the case of Tibble et al. vs. Edison International et al.
Some have called the court's decision in Tibble plaintiff-friendly, meaning there's a possibility that it might encourage more disgruntled plan participants to launch their own lawsuits against other plan sponsors.
The best way to combat any potential legal challenges is ongoing monitoring and solid documentation.
The May 18 ruling highlights the need not only initially to select prudent investments with reasonable fees, but also regularly monitor those investments to ensure their fee structure remains reasonable. What regularly means remains to be seen.
The court held that, under trust law, “a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.”
An important ramification of the Tibble decision is the need to maintain and preserve documentation longer than what was traditionally considered, keeping in mind the court held that a lawsuit filed within six years of a breach of continuing duty will not be time barred.
While the decision was narrowly focused, there are several takeaways for plan fiduciaries.
There is a clear requirement for ongoing monitoring, but it is unclear from the ruling what that monitoring consists of. For those plan sponsors that have not engaged in a continuous monitoring of plan investments, they should start immediately. For all plan sponsors, this would be a good time to review existing monitoring processes and procedures to ensure alignment with reasonable measures of prudence.
Against this backdrop, this also would be a good time for all plan sponsors to ensure their whole house is in order, including regular reviews of the fees being charged to plan participants, and whether important decisions are well-documented.
As a first step, plan fiduciaries should identify all plan fees. In addition to fees related to record keeping and investments, including revenue-sharing arrangements, other fees include those for investment consulting, legal and accounting services, as well as participant transaction fees for taking loans and distributions from the plan.
Next, plan fiduciaries should outline a clear process of who pays each of the fees and how these fees will be charged.
For instance, will the company absorb record-keeping costs or will the plan participants cover those fees? If the participants are paying, will the fee structure be a flat-dollar, per-participant fee or will the structure be asset-based, closely tying it to an individual's balance? Should the plan generate revenue sharing from the investments so that participants are indirectly paying for the fees? Or, should the plan consist of non-revenue sharing investments with fees being directly deducted from participant accounts? If revenue sharing is being generated, should any excess be allocated back to participants? If so, how?
These are not easy questions, and it is important for fiduciaries to really think through how they're going to pay fees.
The thoughtful, detailed conversations and documented decision points emanating from these discussions will form the basis of the fee philosophy. In light of the ruling, plan sponsors should keep minutes and any documents used to support decisions to the investment menu and plan design for at least seven years.
With a well-developed philosophy, all committee members (whether new or experienced) will be able to follow exactly how the plan fiduciaries came to their decisions about fees and methodology. Whether it's an official record or a working guideline, a documented fee philosophy is an important cornerstone of a sound process.
Given the increased industry scrutiny of retirement plan fees, the benefits of a documented fee philosophy are clear. It can help avoid second-guessing on how fees are paid, as well as defend against potential litigation.
Fees should be a foundational topic for all those who oversee retirement plans. Plan fiduciaries need to identify all plan fees, document the reasonableness of those fees and decide how the fees should be allocated, and review this periodically. The court offered no guidance on reasonable. Sponsors need to ensure they understand the cost drivers of their fees, and ensure they are within a reasonable range of what other providers for similar services would charge.
Keeping written documentation to prove that plan fiduciaries have followed their own rules and established procedures is important. If the plan's investment monitoring diligence comes under question, fiduciaries can refer to a solid set of records.
It serves as a reminder to retirement plan fiduciaries about the importance of good plan governance and the implications of not having sound processes. Plan fiduciaries should make it a priority to continually review their plans' investments, regularly assess and benchmark related fees and, just as importantly, document both processes. Otherwise, fiduciaries might find themselves subject to a lawsuit from participants.