While the Supreme Court rejected the notion that an initial fund review was sufficient in the absence of significant changes in circumstance to preclude the need for an ongoing assessment, the defendants in Tibble did a lot of things right that many plans don’t. Here are five:
1. They had a plan investment committee.
ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself — and, in fact, requires that if you lack the requisite expertise, you must enlist the support of those who do have it. No committee required.
2. They had regular committee meetings.Having a committee and not having committee meetings is potentially worse than not having a committee at all. If there is a group charged with overseeing the activities of the plan and that group doesn’t convene, then one might well assume that the plan is not being properly managed, or that the plan’s activities and providers are not prudently managed and monitored, as the law requires. The Edison investment committee met quarterly to review plan investments and to review reports and recommendations from investment staff.
3. They kept minutes of committee meetings.
There is an old ERISA adage that says, “prudence is process.” However, an updated version of that adage might be “prudence is process — but only if you can prove it.” To that end, a written record of the activities of your plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations.
More significantly, those minutes can provide committee members — both past and future — with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time and making adjustments as warranted — properly documented, of course. And they can be useful in subsequent litigation. Or not.2
4. They had an investment policy statement.
While plan advisors and consultants routinely counsel on the need for, and importance of, an investment policy statement, the reality is that the law does not require one, and thus, many plan sponsors — sometimes at direction of legal counsel — choose not to put one in place.
Of course, if the law does not specifically require a written investment policy statement (IPS) — think of it as investment guidelines for the plan — ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.
Not also that, while not legally required, Labor Department auditors routinely ask for a copy of the plan’s IPS as one of their first requests. And therein lies the rationale behind the counsel of some in the legal profession to forego having a formal IPS: Because if there is one thing worse than not having an investment policy statement, it is having an investment policy statement — in writing — that is not followed.
That said, the Edison investment committee had an IPS, and by all accounts, were attentive to its terms. Terms that apparently were focused on the investment and asset allocation aspects of the fund choices, rather than on the costs and alternatives.
5. They hired an investment professional to help.
The Edison plan investment committee had access to, and relied on the services of, an investment adviser (AonHewitt’s investment consulting arm) to review/select/monitor funds. And they did make fund changes during the period in question (in fact, the district court noted that in 33 of 39 instances during the period in question, they replaced funds with others that actually decreased the revenue-sharing received by the plan).
The Tibble defendants clearly did a lot of things right in reviewing and monitoring their investment menu — so what did they do wrong?
Well, with regard to this litigation, what this $2 billion+ plan didn’t do was ask investment fund providers to waive the minimums for investment in institutional class shares, shares that were reportedly identical in every way save one (fees) to the retail class chosen. It might well be that the IPS itself and the focus of the committee didn’t consider all the factors (notably fees) that play into fund performance and suitability, and should be considered.
Following the Supreme Court’s ruling, it’s clear there is a fiduciary duty to review the funds on the retirement plan menu on an ongoing basis, though how much and how often remain to be established.
But perhaps most importantly, one lesson is now crystal clear now, if it wasn’t previously: “set it and forget it” is not an appropriate standard of review for ERISA fiduciaries.
Nevin E. Adams, JD
Footnotes
1. The district court cited three possible rationales for the retention of retail-class shares offered by witnesses for the defendant/employers — but found no evidence for them in the actions taken (or not taken).
2. The district court noted that witnesses for the defendant/employers offered three possible rationales for keeping the retail shares: If the retail share class of a certain mutual fund had significant performance history and a Morningstar rating, but the institutional share class did not; to avoid confusion among participants resulting from frequent changes in the fund; or if there were certain minimum investment requirements. But Judge Stephen V. Wilson noted that, “None of these explanations is supported by the facts in this case.”
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