29 May 2015
Open questions remain after this month's U.S. Supreme Court decision reaffirming 401(k) plan fiduciaries' ongoing duty to monitor plan investments, attorneys said during a webinar discussing the case.
On May 18, the high court made it easier for 401(k) plan participants to bring lawsuits challenging high-cost investment options that have been in the plan for years by holding that such suits can be based on plan fiduciaries' ongoing duty to monitor those investments (Tibble v. Edison Int'l, 2015 BL 152750, U.S., No. 13-550, 5/18/15 (96 PBD, 5/19/15)).
However, this unanimous opinion “stated only the obvious” and didn't answer important questions, such as how often fiduciaries must engage in the monitoring process, said Nancy G. Ross, a partner in Mayer Brown LLP's Chicago office.
Ross and her colleague, Brian D. Netter of the firm's Washington office, discussed open questions and best practices following Tibble during a May 27 webinar sponsored by Mayer Brown. The webinar was titled Tibble v. Edison International: What It Means for Plan Fiduciaries.
‘Obvious' Opinion Leaves Questions
Ross emphasized that this opinion wasn't a “game-changer,” because most fiduciaries of sophisticated 401(k) plans already employ prudent monitoring processes that likely would withstand judicial scrutiny.
“I see this as a reminder, not a wake-up call,” Ross said.
However, both Ross and Netter agreed that the decision didn't address several important questions about what the fiduciary duty to monitor might entail.
According to Netter, it remains to be seen how the duty to prudently monitor previously selected investment options differs from the duty to prudently select those options in the first place. Although the monitoring duty theoretically should require less of fiduciaries than the duty to prudently select investments, Netter said, the Supreme Court didn't squarely address this distinction.
Ross added that the Tibble decision also failed to address exactly how often a prudent fiduciary must engage in investment monitoring activities.
Annual monitoring may be appropriate for some plans, Ross said, while monitoring every six months may make more sense for others.
“We have no crystal ball as to what type of timing should be employed,” she said. “You have to look at your own plan and see what makes sense.”
More Litigation Coming
Both Ross and Netter agreed that Tibble was likely to spur increased litigation over fiduciary management of 401(k) plans.
In particular, Ross said that the decision could encourage litigation outside of the specific context of investment monitoring and plan fees.
Although the ruling is “narrowly focused” on investment selection, Ross said she thinks it's “very likely” that the plaintiffs' bar will use this opinion to challenge other types of fiduciary conduct, such as a fiduciary's duty to monitor service providers.
Ross further speculated that the decision could spur claims of failure to monitor revenue-sharing arrangements or failure to monitor the development of conflicts of interest.
According to Ross, this “innocuous decision by the Supreme Court” may ultimately “serve as the backbone for many other different types of claims.”
Netter agreed, saying that Supreme Court decisions under the Employee Retirement Income Security Act frequently spur additional ERISA litigation, even if the decision wasn't particularly plaintiff-friendly.
“I think it's reasonable to expect that these breach of duty to monitor claims will start to arrive in a good number of additional complaints,” he said.
Although the Tibble decision may not have broken much new ground, Ross said that it should remind plan fiduciaries to be on top of their monitoring practices.
“It's a good reminder that you do need to sharpen your pencils, and you do need to look at the processes that you're using, both in the selection process and the monitoring process,” she said.
In particular, Ross said that fiduciaries would “be wise” to document both the deliberation process and the final decision made in the course of their investment monitoring practices. Failure to document either the deliberation process or the final decision will raise judges' eyebrows, Ross said.
She further advised fiduciaries to have a “well-documented” monitoring process that is in line with industry standards and that is being clearly followed.
Calling each of these requirements “essential,” she said that the monitoring process “needs to be contemplative, it needs to be similar to what your peers are doing, it needs to be well-documented, and it needs to be followed.”
“Fiduciaries cannot be on autopilot,” she said. “They need to be able to show due diligence not only in the selection process but in the ongoing monitoring process.”
Reproduced with permission from Pension & Benefits Daily, 103 PBD (May 29, 2015). Copyright 2015 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.