Supreme Court Decision on 401(k) Fiduciary Responsibility

Supreme Court Decision on 401(k) Fiduciary Responsibility

This article describes a recent Supreme Court decision which requires plan sponsors and investment advisors to regularly review the investments within a retirement plan...


Duty to Retirement Plans Expanded, Investment News

May 24, 2015

Advisers need to be aware of a Supreme Court decision in a major 401(k) fee case's implications for their plan advisory work


The Supreme Court just increased the burden on anyone who serves as a fiduciary to a defined-contribution plan.

Advisers with clients who are sponsors of, or serve as trustees to, 401(k)s and other defined-contribution plans should advise those clients of the Supreme Court's ruling that they have a “continuing duty to monitor trust investments and remove imprudent ones.”

And any financial advisers who provide guidance on investments to such plans also should be aware of the decision's implications for their advisory work.

The ruling overturned the previous understanding, and two lower court rulings, that relied on the Employee Retirement Income Security Act, which specifies a six-year limit to fiduciary liability. The Supreme Court reached back to trust law, which said that fiduciaries to a plan not only must exercise prudence in selecting investments but are “required to conduct a regular review of its investments, with the nature and timing of the review contingent on the circumstances.”

The case, Tibble v. Edison, arose when participants in the Edison International 401(k) plan accused plan executives of breaching their fiduciary duties by including certain retail-priced mutual funds in the plan rather than institutionally priced versions of the same funds. Of the 40 funds offered by the plan, six were retail share class funds and thus were more costly than institutional shares.

Advisers must alert their business clients who have defined-contribution plans of the expanded obligations. In particular, the clients must consider the relative costs of the investment options offered in the plans and must choose the least expensive of equivalent options. They also must regularly review the investment options and replace any that don't seem to be performing.

Advisers also must be aware of their exposure if they provide assistance in selecting investment options. They might be held to the same standards as sponsors and trustees.

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