A Supremely Compelling Case for Never Paying Unjustified Retirement Investment Fees

by Mary Brunson and Mark Hebner - Thursday, 21 May, 2015

We are very pleased with this historic and landmark, unanimous decision by the Supreme Court. Going forward, this decision will be of great significance for American workers and retirees for generations to come, as the 401(k) plan has become America’s retirement system.
Jerry Schlicter, plaintiff’s attorney (Tibble vs. Edison Int’l)  Ruled on by the U.S. Supreme Court, May 17, 2015

Retirement plan sponsors and advisors just received a very strong message from the Supreme Court: "mind the price or pay the price."

The long-awaited decision in the case of Tibble vs. Edison International is a victory for all retirement plan participants as there is now case law in the books (and from the highest court in the land—that requires plan sponsors and their advisors to shop prices, constantly).

The sweeping win comes courtesy of Edison plan participants who sued their employer for including six retail share class funds in its 40-fund 401(k) lineup. Retail funds are more costly than their institutional counterparts, and deemed not appropriate for the plan given the number of participants and assets in the plan.

What Do Plan Sponsors Need to Know About this Key Decision?

Fees must be deemed reasonable for services provided. This does not mean that a sponsor or advisor always needs to select the lowest cost option, but rather they must design and implement a purposeful, well-documented process for investment selection. This process should be based on capturing a particular asset class exposure at a reasonable cost, and with an in-depth understanding of the plan characteristics in terms of size and demographics, as well as an understanding of what types of instruments are appropriate, in light of the facts, circumstances and relative to per groups.

Market climates change—and so do fees. The lower court ruled in favor of Edison, having deemed that the six-year statute of limitations had run out since the retail funds were initially selected for the plan. The Supreme Court unanimously disagreed, however, ruling that plan sponsors or their advisors must “continuously monitor funds once they are in a 401(k) plan,” according to a summary from the firm of plaintiffs’ attorney Jerry Schlicter.  “Fiduciaries can’t put the plan on auto-pilot,” Schlichter added.

If you are a plan sponsor or advisor, you have an ongoing duty to monitor for fees and performance. At IFA, we do not feel retail shares are appropriate for any plan, irrespective of plan size. Pricing pressures within the mutual fund marketplace can impact fees as well, creating the effect of fee compression. It is not well enough to keep a fund in a lineup that was once justifiable, but is no longer appropriate given industry changes.

Know the statute—follow the statute. ERISA lays out the foundation for properly implementing an investment selection process. A fiduciary has a duty to:

  • Select risk and return objectives reasonably suited to the particular trust
  • Evaluate investments in the context of the portfolio as a whole  
  • Avoid unreasonable fees  
  • Monitor service providers to ensure they are performing in accordance with contracts and the Investment Policy Statement 
  • Investigate information likely to bear importantly on the value of an investment  

Document, Delegate and Monitor.  If your particular plan committee lacks the time, process or particular areas of expertise to manage the fiduciary process, you can delegate to third parties who sufficiently demonstrate proof of process and subject matter expertise to properly execute these functions. Under ERISA, delegation of investment selection, monitoring and replacement is known as a 3(38) investment manager. Delegating such functions to a 3(38) investment manager providers plan fiduciaries fiduciary protection for these specific functions. This is the type of fiduciary protection would have saved Edison an enormous amount of bad press, and legal bills. 

Documented due diligence and monitoring of selected subject matter experts can effectively afford you fiduciary protection against claims such as those levied by Edison plan participants.  As important, your participants will benefit from a well-run plan, one that will give them a well-organized lineup with easy-to-select, easy-to-own investments, and

… you will never pay unjustified retirement investment fees.  

To learn more about how you can increase your fiduciary protection, call Index Fund Advisors at 888-643-3133.