Ours is a complex business. For one thing, it’s fraught with potential peril for inattentive plan fiduciaries, many of whom find themselves tasked with the responsibilities of the role (frequently as part of a much wider range of responsibilities) with little in the way of background, training or explanation to help.
And then you have the defendants in the Tibble v. Edison International case: a large ($2 billion-plus) plan that not only had an investment committee, but also one separate from the benefits administration function. Moreover, that investment committee had access to the services of an investment advisor (Hewitt’s investment consulting arm) to review, select and monitor funds and, according to the findings of the lower courts, a review process that was attentive to the requirements of an investment policy statement (IPS).
What they did not do was ask about the availability of lower-priced institutional shares.
However, that wasn’t the issue before the U.S. Supreme Court this past week. Rather, the Court was asked to decide how to apply ERISA’s statute of limitations to the action of selecting these funds. Three of the retail class funds were added as plan investment options in 1999; three more were added in 2002. The plan sponsor plaintiffs had successfully argued before the 9th Circuit that when the suit was brought in 2007, the funds which were added in 1999 had been on the plan menu for more than six years — beyond ERISA's statute of limitations. At issue was whether the prudence of that older selection could be challenged.
In the presentations before the Supreme Court, both parties agreed that there was a fiduciary duty to review plan investments, and both parties were willing to concede that the initial review and selection of an investment fund should be more extensive than just considering the retention or replacement of a fund that was already on the investment menu. It was the nature and extent of that review that consumed much of the discussion during the hearing.
In the initial ruling in the case, the district court said there had to be a change in circumstances significant enough to make the continued investment in that investment option an imprudent one, and cited legal precedent for its view. The discussion last week noted precedents in the 9th, 4th and 11th Circuits saying that change would have to be tantamount to adding a new fund. In Tibble, there doesn’t appear to have been a change in the funds on the menu per se, but rather, the mere existence of lower-cost institutional shares.
However, the Assistant to the Solicitor General, appearing in support of the plaintiffs’ position as a friend of the court, told the justices that in its assessment, the ongoing monitoring of investment options was "not limited to circumstances in which the fund changed so much that it's like a new fund is being put in place.”
It remains to be seen how the Supreme Court’s view of the level of review and the circumstances that trigger it will affect the outcome of this case. We’ll have an answer by June.
That said, the words that linger in my mind — and that I think plan fiduciaries should remember — also came from the Assistant Solicitor General: “You have a duty to look on a periodic basis and, really, how are you going to know if there have been changes unless you looked.”
- Nevin E. Adams, JD