He explains that the top federal court in Tibble held there is an ongoing fiduciary duty to monitor investments in a 401(k) plan to ensure that the investments remain prudent, “which applies even if there is no intervening change in circumstances.” The Supreme Court actually vacated and remanded the specifics in the long-running fee case back to the 9th U.S. Circuit Court of Appeals, which is left with the task of more closely defining what the duty to monitor should look like in this particular case or others like it.
Limited in size and scope—the text of the ruling covers just 10 pages—the decision from the Supreme Court still seems to solidify the ongoing duty to monitor investments as a distinct fiduciary duty, so it’s important for plan sponsors to consider what the ruling means for them.
“What this means is that an employer or other responsible fiduciary will not avoid potential liability if it selects an imprudent investment alternative for the 401(k) plan, but then successfully waits out the six-year ERISA limitations period,” Gelsomini suggests.
Generally, 401(k) plan investment fiduciaries carefully examine a potential investment when first deciding what options to offer under the 401(k) plan, Gelsomini tells PLANSPONSOR. This is especially true in the case of the plan’s qualified default investment alternative (QDIA), which will serve as a catch all investment vehicle for anyone automatically enrolled into the plan without actively choosing another investment from the menu. Prudent selection and documentation are key requirements underlying the QDIA safe harbor, which protects ERISA plan fiduciaries from liability in the case that the automatic investment loses money and participants seek damages.
“If the investment is deemed to be prudent and is selected as [the QDIA], the fiduciary generally will continue to offer the investment as an alternative unless a change in circumstances renders it imprudent,” Gelsomini says. “Following the Supreme Court’s decision in Tibble, an investment alternative must continue to be monitored for prudence under ERISA on an ongoing basis even if there is no material change in circumstances.”
Specific issues to monitor for in the QDIA and other investments include impermissible changes in investment style or risk taking, Gelsomini explains. Others include persistent underperformance over a series of quarters, excessive increases in fees, and any other factors outlined in the plan’s investment policy statement or plan documents.
While it’s clear the duty to monitor is an independent duty from the duty to prudently select, Gelsomini notes the Supreme Court did not actually opine regarding how often or comprehensively a responsible plan fiduciary must perform the review of an investment alternative if there has been no blatant intervening change in circumstances that might indicate the alternative is imprudent. Another ERISA litigation expert, Sidley Austin LLP’s Mark Blocker, also says it’s unclear whether this decision will have a substantial impact on retirement plan sponsors and their advisers, given that most plans have already taken steps to avoid Tibble-like liability.
“Virtually all large employers already conduct periodic reviews of the investment options in the 401(k) plans they sponsor, so the decision will not require any major new activities on their part,” Blocker explains. “What remains to be seen is how the duty to monitor will be interpreted, a question that was not answered by the court and was left to the lower courts to determine.”
“This is an open question that may need to be fleshed out by the courts in upcoming years,” Gelsomini agrees. “In the meantime, there are other steps that employers can take to protect their investment fiduciaries.”
He suggests each employer could review the 401(k) plan’s investment policy statement to ensure that it contains clear guidelines specifying how often the responsible plan fiduciary must perform a comprehensive review of investment alternatives, even absent an intervening change in circumstances. The policy may also specify the proper steps to remove an investment if it is deemed imprudent, Gelsomini says. One thing to note is that, once language about periodic investment reviews is placed into the policy statement, it's absolutely critical to ensure the plan operations match what is written down.
“If there are no clear guidelines in place, or if the guidelines provide for infrequent review, the employer should amend the investment policy statement to provide for a comprehensive review of each investment alternative at least annually, and more frequently if the responsible plan fiduciary determines that doing so would be prudent under ERISA’s fiduciary standards,” Gelsomini says. “Finally, perform a comprehensive review of all investments, if such a review has not been performed recently, and otherwise comply with the compliant investment policy statement.”