Fiduciary Alert! – US Supreme Court Rules on 401(k) Monitoring & Liability

With huge importance for those responsible for their company 401(k), the US Supreme Court ruled unanimously on Monday that retirement plan administrators have an ongoing obligation to monitor plan investments and remove imprudent ones, that funds must be in the lowest available share class and that plan participants have the right to ask certain questions of administrators related to fees and plan investment options.

This is huge because most plans are flying nearly on autopilot, without investment policy statements or with ones so weak that they list no specific monitorable and documentable criteria relating to:

  1. Selecting, monitoring and replacing plan investments
  2. Funds required to be in the lowest available share class
  3. How fund performance and characteristics compare to peers
  4. Allowable fund expense ratios and the level of hidden fund costs
  5. Other prudent considerations that must be monitored and documented.

It is important to realize that these issues are not covered as part of the plan’s annual audit (if required) and are not generally discussed by the plan’s outside administrator or recordkeeper or by the current investment advisor to the plan.

Importantly, the Court overruled an objection that the 6-year statute of limitations had passed in this Tibble v Edison case, saying that plan fiduciaries have a duty to monitor and replace funds that is an ongoing responsibility with attendant liability.

Many companies leave the oversight of the plan investment lineup up to their plan provider and bring it up only on an ad hoc basis when something is obviously wrong, not having a robust investment policy statement with specific, monitorable criteria that forms the basis of regular reviews and ongoing monitoring and documentation. According to this ruling, leaving it up to the plan provider rather than implementing such prudent processes is a big mistake.

A Wall St. Journal article on this mentioned that many companies have been sued over fees and poor investment performance recently. They should have been. Many plans today have higher cost and lesser performance than they should.

With recently increased Dept. of Labor audits and the big jump in lawsuits, companies can no longer afford not to have specific criteria by which they monitor the plan and its investment options.

This nearly always requires the help of a 401(k) consultant or an investment advisor that is an Accredited Investment Fiduciary (AIF). Current investment advisors in many cases have failed to properly inform the plan fiduciaries, putting them in legal jeopardy on these issues.

I am an Accredited Investment Fiduciary and these types of issues are the focus of my practice. It is important that if you are involved in the running of a retirement plan for your company that you contact me to evaluate your plan and put in place prudent processes and documentation to help your plan run better at lower cost and keep you out of harm’s way.

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