26 February 2015
On February 24, the US Supreme Court heard arguments in an ERISA case challenging the prudence of certain investment options included within a 401(k) lineup. Although a decision is not expected until spring, certain risk avoidance lessons for plan sponsors and fiduciaries follow from the proceedings to date.
At argument, the Court focused on an issue that it had not originally agreed to consider. The Court granted certiorari to decide whether ERISA’s six-year period of repose bars challenges to investments that have been in a plan for more than six years. But in the briefing, all parties agreed that there is no time bar if a plaintiff claims that a fiduciary breached the duty to monitor the plan during the six-year look-back period—a duty that is distinct from the duty to engage in a prudent process for selecting the investment in the first instance.
At oral argument, the Justices engaged the parties on what a fiduciary must do to prudently monitor plan investments. The plan-participant plaintiffs argued that a fiduciary must revisit investment selections even where nothing has changed, and must remove the investments if they are imprudent. The company argued that the duty of prudence in monitoring does not require removal of an investment unless there has been a material adverse change, such as in the investment’s performance or fees.
The Justices were clearly interested in the details: How detailed should the review be? How frequent must it be undertaken? But several Justices expressed reluctance to engage in the fact-intensive analysis ERISA requires in judging fiduciary prudence, which looks to what a reasonable person of like education, skill and experience would do in like circumstances. The likeliest outcome for this case is a remand for the lower courts to sort out what factual questions remain to be decided under the correct legal standard.
Pending the Court’s decision, the takeaway for plan sponsors and fiduciaries is that there has never been a more important time to revisit investment monitoring practices and procedures. Fiduciary committees should not just limit their regular review to comparing investment performance and fees to appropriate benchmarks. Rather, to minimize the risk of potential litigation, fiduciary committees should expand their analyses to make sure that each investment continues to meet the objectives of the plan’s investment policy statement, that it makes sense when viewed as part of the plan’s entire portfolio and that it remains an appropriate choice among others in its asset class. The latter evaluations need not be done as frequently as performance and fees monitoring, but should be part of an annual review. Such a review might also include appropriate independent advisors. These steps, memorialized properly, will go a long way in deterring plaintiffs’ lawyers from preying on your plan.