Supreme Court: Fiduciaries Must Monitor Offered 401(k) Investment Alternatives

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. This post is based on a WSGR alert.

On May 18, 2015, the U.S. Supreme Court unanimously held in Tibble v. Edison International that fiduciaries of 401(k) retirement plans have a continuing duty under the Employee Retirement Income Security Act of 1974 (ERISA) to monitor an investment alternative offered under a 401(k) plan after it is selected. In monitoring an investment alternative, the fiduciaries must engage in a prudent process. [1]

Although the principle described in Tibble was well understood by many 401(k) plan fiduciaries, the decision nonetheless serves as an important reminder that it is necessary for 401(k) plan fiduciaries to implement a due diligence process that will withstand scrutiny from the federal courts and the U.S. Department of Labor upon review.

Legal Background

The individuals who have oversight of a 401(k) plan typically are set forth in the 401(k) plan document. The plan document often provides that the plan sponsor (i.e., the board of directors) or its delegate (e.g., the compensation committee) has full responsibility as the “named fiduciary” of the plan. In some cases, the 401(k) plan committee is specified in the plan document as the named fiduciary. In addition, any other individuals who exert discretion in the management of the assets or in the administration of a 401(k) plan likely also are 401(k) plan fiduciaries.

Under ERISA, 401(k) plan fiduciaries are charged with a duty to act prudently, which includes a duty to choose investments that are sensible at the time of selection. Many federal courts have held that the duty of prudence requires a 401(k) plan fiduciary to discharge his or her duties with the care, skill, and diligence that would be exercised by a reasonably prudent person who is familiar with such matters. The determination as to whether or not a 401(k) fiduciary has acted prudently generally focuses on the fiduciary’s conduct in arriving at an investment decision and assessing whether the fiduciary exercised the appropriate due diligence for a particular investment.

The Tibble Case

The Supreme Court in the Tibble decision held that the duty of prudence under ERISA includes a continuing duty to monitor an investment alternative offered under a 401(k) plan after it has been selected. The Court stated that the nature and timing of the duty to review an investment alternative is based upon the relevant facts and circumstances.

The Tibble decision did not spell out any particular process that should be followed by 401(k) plan fiduciaries. For example, the Supreme Court did not say how often fiduciaries must engage in the monitoring process, and it is unclear if a periodic review is adequate or if a review is only necessary if some change in the character of an investment occurs. Nonetheless, we recommend that 401(k) plan fiduciaries regularly monitor a 401(k) plan’s investment alternatives, at least once a year in most cases.

Action Items

Below are action items that 401(k) plan fiduciaries should consider in light of the Tibble decision and the recent increase in litigation regarding fiduciary management of 401(k) plans.

  1. Companies should determine whether the authority for overseeing the 401(k) plan should be delegated to a committee rather than the board of directors.
  2. The 401(k) plan fiduciaries should:
    • Meet regularly to examine investment alternatives in regard to current and long-term performance and relative to other investments in the same class, as well as with respect to fees and expenses charged to participant investments.
    • Adopt and follow an investment policy statement.
    • Document decision-making through minutes or resolutions.
    • Consider retaining advisors and other experts to provide guidance as to which investment alternatives should be added and removed.
    • Monitor service providers and other parties to whom responsibility has been delegated or otherwise outsourced.

    Although most companies already follow procedures similar to those listed above, the announcement of the Tibble decision provides a reminder to review and assess these procedures to ensure that they are being adhered to properly.

  3. The plan sponsor may want to consider providing 401(k) fiduciaries with indemnification rights and/or procuring fiduciary insurance.


[1] Tibble v. Edison International, 575 U.S. _________ (2015). The 401(k) plan participants in Edison International’s 401(k) plan alleged in Tibble that the fiduciaries of the plan breached their fiduciary duties under ERISA with respect to three funds selected in 1999 and three funds selected in 2002. The funds in question were retail-class mutual funds and the petitioners alleged that similar institutional-class mutual funds were available at a lower cost and that the failure to offer the lower-cost funds was a breach of the fiduciaries’ duties under ERISA. The lower courts had previously dismissed these claims as untimely under ERISA’s statute of limitations. The Supreme Court, however, revived the claims by holding that a continuing duty to monitor investments exists.
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