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AARP Brief Asks Supreme Court to Uphold Retirement Plan Accountability

A case before the U.S. Supreme Court addresses the obligations of 401(k) plan administrators to monitor fees charged by the investment vehicles which their plans make available to plan participants.

Background

Participants in a 401(k) plan administered by Edison International challenged investment decisions made by the plan administrators, arguing that the administrators violated their fiduciary duties under the federal Employee Retirement Income Security Act (ERISA) when they continued to offer retail class mutual fund shares to plan participants even though lower cost institutional class shares were available to the plan. The participants sued, seeking damaged for the excessive fees they incurred on account of the plan fiduciary’s failure to seek the lowest investment management fees available to the plan in light of the very substantial plan balances.

ERISA imposes strict fiduciary duties on administrators to exercise diligence, care, prudence, and good financial judgment. But in this case the defendants argue, however, that ERISA also imposes a six-year statute of limitations on challenges to fiduciary conduct by plan participants and that because the initial fiduciary decision to stock plan investment options with mutual funds that carried high fee retail class shares occurred more than six years before the complaint was filed, the six-year limitation barred claims against the plan fiduciary for maintaining the high-fee investment options in the plan.

Plaintiffs argue that because the administrators had a continuing fiduciary duty to monitor the plan’s investment options, the clock was re-set every time the plan administrator did or should have monitored the plan investment options. The U.S. Court of Appeals for the Ninth Circuit agreed, setting up a split in the circuits on the issue, as the seventh circuit had ruled otherwise. This sent the dispute to the U.S. Supreme Court.

AARP’s friend-of-the-court brief, filed by attorneys with AARP Foundation Litigation, points out that with the prevalence of defined contribution plans (which are supplanting the traditional defined benefit plans), workers must depend on plan administrators to exercise all the diligence the law affords. Plan participants rely a great deal on plan administrators and those administrators should be required to do periodic investment option reviews, and be held to strict scrutiny each time they do.  “ERISA and existing industry standards of practice impose a duty to regularly monitor plan investment performance, including the level and appropriateness of applicable fees,” the brief points out. The brief emphasizes that the Department of Labor and even law firms advising plan administrators publicize a continuing duty to monitor fees. Excessive fees aggregate to significant sums over time, and plan participants may be deprived of essential retirement savings by fiduciary laxity toward the fees leveled against the participants’ accounts.

What’s at Stake

ERISA was enacted to protect workers and retirees who are plan participants from misdeeds in the management  of  their plans by plan fiduciaries. The retirement savings held by plan participants in their accounts often represents literally a lifetime’s worth of savings. As employee retirement plans move from defined benefit (where participants are promised a set benefit) to defined contribution (where benefits depend on the performance of contributed funds), vigilance in fund performance becomes more and more important so as to give plan participants an opportunity to amass as much retirement security as is attainable. Minimizing the fees that are levied against participant accounts is of the essence of fiduciary action to facilitate opportunities to maximize account values.

Case Status

Tibble v. Edison is before the U.S. Supreme Court