You may have missed the Supreme Court’s recent ruling in the case of Tibble v. Edison International. But if you have a 401(k), the decision is worth a second look.
The case was not very dramatic, and the unanimous ruling was not especially surprising, according to many of those following the case. Employees at Edison International, a California-based utility company, sued the firm over the investment offerings in its 401(k) plan. The high court’s decision not only supported the plaintiffs’ cause, however; it will ultimately reinforce the duty of employers to make a responsible effort to secure the best investment options possible for plan participants.
The basis of the Tibble case was the plaintiffs’ claim that Edison International violated its fiduciary duty to employees participating in its 401(k) plan by offering only high-cost retail funds, instead of their lower-cost institutional equivalents. Edison countered, initially, that the 401(k) plan’s menu of offerings had been determined more than six years prior, putting it outside the statute of limitations for the legal obligations upon which the plaintiffs relied in their suit. The Ninth Circuit Court of Appeals agreed with Edison; the employees then asked for a hearing by the Supreme Court.
By the time the case reached the argument stage, Edison more or less conceded that it had some responsibility to continue evaluating new and more cost-effective plan options over time. The Court, however, seemed to want to make a plan provider’s duty very clear. It isn’t enough for an employer to make sound investment choices when setting up a plan in the first place; “set it and forget it” is not sound policy when an individual investor behaves that way, and it isn’t sound policy when an employer does, either. A fiduciary must make prudent ongoing decisions about when and how to change the composition of a plan’s portfolio.
Ultimately, in a brief 10-page decision, the Court remanded the case to the Ninth Circuit, making clear that “changed circumstances” are not the only circumstance in which a fiduciary is responsible for re-evaluating existing investments.
This is the right decision. Fiduciaries should do right by those to whom they owe their duty, and that goes beyond simply satisfying a bare minimum of care at the outset.
Fees are one of the most important places a fiduciary can succeed or fail. My colleague David Walters wrote in more detail about the large effects investment fees can have on a 401(k) account over time; a 2012 study recently quoted by Forbes found that fees can consume nearly one-third of a median-income family’s investment returns over a lifetime. On that scale, small differences add up quickly. The result of Tibble will likely be that employers not only review their offerings more regularly, but may also become more proactive in negotiating better deals with financial companies in the first place.
On the other hand, many employers will probably not need to make big changes if they are already monitoring their plan offerings. Nancy Ross, a partner in Mayer Brown’s Chicago office, commented that Tibble simply gives notice to plan sponsors that they should create and follow a well-documented plan for monitoring their offerings. According to a survey by Aon Hewitt, about two-thirds of retirement plan sponsors said they were now very likely to review plan expenses in 2015. And while fees aren’t the only issue sponsors, or participants, need to keep an eye on, they are a relatively obvious place to demonstrate attention and care to an outside observer. They are also an important, if complicated, metric by which investors can consider how well their plan offerings stack up against other alternatives.
At Palisades Hudson, we advise 401(k) plans and already perform the sort of monitoring the Supreme Court said was necessary. When we advise a 401(k), we ensure the plan offers low-cost index funds, such as those offered by Vanguard, which are consistently among the lowest cost funds available. We also ensure that the least expensive share classes are offered in 401(k)s that we advise. Tibble did not change anything for us, but it is an important reminder of the responsibility a fiduciary owes. It isn’t about making a responsible choice once; it’s about responsible monitoring and evaluation over the long term.
For plan participants, the Tibble decision confirms that their 401(k) plan sponsors need to keep participants’ best interest at heart. It is a win for retirement savers, and the rare unanimous high court decision only emphasizes that it is a matter we all can, and should, agree on.