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Last week, Frontline published an article as a follow-up to its 2013 documentary “The Retirement Gamble.” That documentary painted a picture of a retirement industry mired in hidden fees and conflicts of interests. In the new article, Frontline interviewed Jerome Schlichter, a St. Louis attorney specializing in suing plan sponsors for excessive 401(k) fees. Over the years, Schlichter has settled six 401(k) cases, including cases against General Dynamics, International Paper and Caterpillar. The settlements have been huge and influential, generating $125 million in recoveries to 300,000 participants.
Personally, I don’t know what to make of Jerry Schlichter – is he an altruistic champion for savers’ rights or an opportunistic ambulance chaser? Regardless, I think his lawsuits have helped bring attention to the issues of hidden retirement plan fees and conflicts of interest – and for that, I am thankful.
Tibble v. Edison International – A Big Deal
Last month, a Schlichter case, Tibble v. Edison International, reached the Supreme Court. The ramifications of this case for 401(k) sponsors could be huge. If the workers win, it could make it easier for workers to sue their employer for failing to meet its fiduciary duty and set off a wave of similar suits across the country. All 401(k) sponsors should pay close attention to the Tibble case.
In 2007 workers, led by Glenn Tibble, alleged their employer, Edison, breached their duty of prudence by offering six higher-cost retail-class mutual funds to plan participants, even though identical, lower-cost institution-class mutual funds were available. Three of the six funds were added to the plan in 1999, the other three were added in 2002.
In March 2013, the Ninth Circuit Court of Appeals affirmed a District Court’s judgment that Edison breached its fiduciary duties by inadequately investigating lower-cost alternatives for the funds added in 2002. The 1999 funds were barred from consideration because they were added to the plan more than 6 years prior to the date of the suit, exceeding ERISA’s statute of limitations. All other claims were dismissed.
After the Ninth Circuit decision, the Supreme Court agreed to hear an appeal from Tibble and review whether or not ERISA’s 6-year statute of limitations applied to the 1999 funds.
Early in the hearing, all parties, including the Justices, agreed the 6-year statute of limitations did not apply to the 1999 funds if Edison failed to monitor plan investments during the look-back period. What was not agreed upon, however, was the depth and frequency Edison had to look at the investments to satisfy its monitoring duty.
The answer to this new question could have significant ramifications for 401(k) plan sponsors. What if the court determines monitoring standards and a sponsor fails to meet those standards? That could make it easier for participants to sue that sponsor for a lack of prudence when selecting, or retaining, retirement plan investment options.
Fiduciaries Must Monitor Investments
The Supreme Court has made it pretty clear that they believe there is an ongoing fiduciary duty to monitor investment options periodically.
Some investments are easier for fiduciaries to monitor than others. It’s easy to monitor indexed, or “passively-managed,” funds since their objective is replicating the returns of an index. Monitoring “actively-managed” funds can be more challenging. Generally, these funds are more expensive than passively managed funds and their objective is beating the returns of an index. At a minimum, fiduciaries should prove actively-managed funds outperform comparable index funds after expenses. It’s important to note that many actively-managed funds are offered in different share classes, each with different fees and expenses. Fiduciaries should be sure their plan holds the lowest-price share class it qualifies for.
Hiring a professional financial advisor is advisable when fiduciaries do not feel comfortable meeting their ongoing monitoring duty. The DOL has tips for selecting and monitoring plan service providers on their website.
Don’t become a target for Jerry Schlichter
Jerry Schlichter is making quite a name for himself going after companies that sponsor high-priced 401k plans. The irony is that 401(k) sponsors can easily reduce their liability by not falling into one (or both) of the traps Schlichter mentions in the Frontline article – apathy and self-dealing.
When 401(k) expenses are paid from plan assets, it can be easy for sponsors to become apathetic when evaluating expenses since these expenses don’t directly affect the company’s bottom line. Such apathy should be avoided because 401(k) fiduciaries can be found personally liable for excessive fees.
401(k) service providers may offer other services in addition to 401(k) (e.g., payroll, banking, insurance). When a sponsor utilizes multiple services from a single company, it’s important they ensure 401(k) fees are not subsidizing the fees they pay for other services. Otherwise, the sponsor could be accused of “self-dealing” since they are a beneficiary of the subsidies and not plan participants.
The Tibble case will likely result in significant guidance on how fiduciaries should carry out their monitoring duty. In the meantime, fiduciaries should review plan investments quarterly for performance and share class. If a fiduciary needs help in meeting their monitoring duty, an investment professional should be hired – preferably an investment professional that agrees to serve the plan in a fiduciary capacity.
