By: David I Gensler, MSPA, MAAA, EA
Tibble v Edison broke new ground in terms of clarifying that plan stewards have “an ongoing duty to monitor plan investments.” In the Tibble case, the Supreme Court rejected the argument that an initial fund review was sufficient when facts and circumstances may have changed to preclude the need for an ongoing assessment of a retirement plan’s fund lineup.
However, the defendants in Tibble actually did a lot of things right that many retirement plans fail to do. Here are the top five:
1. They had a formal investment committee
Two heads are better than one, three heads are better than two, etc. ERISA does not require that the plan’s fiduciary form an investment committee. However, it does require that if you lack the requisite expertise to make the sorts of investment decisions unique to 401(k) plans (establishing the metrics that funds will be benchmarked against, evaluating the fund lineup, etc.), you should reach out to someone or an organization that has that expertise. Forming an investment committee to review the plan’s investment performance is just a wise thing to do.
2. The investment committee met regularly
Going to the trouble of forming an investment committee and then failing to hold regular and ongoing committee meetings is potentially worse than not having a committee at all. The argument could be made that if the investment committee does not meet, that the plan is not being properly managed. The Edison investment committee met on a quarterly basis to review the plan’s investments and to review investment reports.
3. They kept minutes of the committee meetings
If there is no formal record that the investment committee met (even if they did) then you cannot prove that it ever happened. Having a written record of the investment committee is an essential ingredient in demonstrating that the meetings took place. Furthermore, it provides a window into the thought process that went into making certain decisions at the time that they were made. And they can be very useful if litigation were to occur. Edison was quite diligent in that it kept minutes of investment committee’s meetings.
4. They had an Investment Policy Statement (IPS)
First things first. ERISA does not require any plan to have a written investment policy statement (IPS). That being said, I would think that it would be easier to evaluate the plan’s investment choices if you were working from a set of established, prudent standards, especially if those standards were in writing.
Furthermore, even though it is not legally required, the Department of Labor routinely asks for a copy of the IPS when they do one of their investigations. Again, having an IPS and not adhering to it is, in my opinion, worse than not having one at all. Edison’s investment committee has an IPS and by all accounts, used it to focus on the plan’s fund choices and asset allocations.
5. They hired an investment professional to help
Edison’s investment committee relied on the services of an outside adviser to assist them in reviewing, selecting and monitoring their fund choices. In fact, during the period in question, the district court noted that in 33 of 39 instances, they replaced funds that served to decrease the plan’s revenue sharing expenses.
So if the Edison defendants did all of this reviewing and monitoring, why the litigation? Well, what this $2 billion+ plan did not do was ask their investment fund providers to waive the minimums for investment in institutional class shares. This would have served to lower the expenses that the participants pay. The committee did not consider one of the primary factors (fees) that are part of a fund’s performance and suitability to remain as an investment choice in the plan.
One of the clear messages that emerged from this litigation is that a “set it and forget it” mentality is not an appropriate standard of review for ERISA fiduciaries. If your plan is large enough, the participants and the plan’s fiduciaries will certainly benefit by following these fairly simple procedures.