The administration of a 401(k) plan requires a lot of attention, recordkeeping, and disclosures. In fact, many companies have dedicated resources in place to ensure that administrative issues are addressed. Let’s face it: managing participant needs, requests, and investment options are not an easy task. To make matters more complex for companies, there has been more and more attention placed on plan administration transparency. In 2012, the Department of Labor issued regulations requiring plan administrators significantly enhance disclosure and transparency about plan investments and their related fees. More recently, the Supreme Court issued a ruling that again expands the duties of plan sponsors in both the transparency and managing of plan mutual fund investment options. The net impact of these changes translates into a greater administrative and risk-management burden for plan sponsors.
In the case heard by the Supreme Court, Tibble v Edison, it was argued that the six year statute of limitations does not prohibit an employee from bringing litigation against employers for retaining expensive investments in the company retirement. The case was one of the first to address the issue of whether it is appropriate for a large plan to offer expense retail class mutual funds as an investment option when less costly institutional class funds were available. At the heart of the issue was the investment fees that participants were required to pay when making an investment. In this case, plan participants were forced to pay a higher fee when a lower fee option was available. It was argued that plan sponsors have an ongoing fiduciary duty to conduct an ongoing assessment of plan investments (and their fees) to ensure an appropriate value for plan participants.
Court Ruling & Impact
The Court ruled in a 9-0 decision that Edison, a Rosemead, CA, public utility company, had a “continuing duty to monitor” the investment options offered in retirement plans. As part of this, they are required, when necessary, to make changes to ensure they are offering the most cost effective investment options possible to participants. In this case, the ruling made it clear that Edison was not properly conducting the required monitoring. Beyond this, the Court also ruled that employees do have the right to sue employers if they neglect their continuing duty to monitor mutual funds in 401(k) accounts that have unnecessarily high fees.
The full impact of the ruling is not yet clear. It is important to note that there was no specific guidance provided on how often a review needs to be conducted and whether it should be done by the plan sponsor or if it can be outsourced. What is clear is that the responsibility for monitoring, and the consequences for not doing so, are now squarely on the shoulders of plan administrators (companies). This means companies will soon need to re-assess their plan administration processes to ensure compliance and limit the risk exposure from participant litigation.
Do you have concerns about the new ruling and how it will impact the administration of your retirement plan? JLK Rosenberger wants to help! For additional information, please contact us at 949-860-9902 or click here for email. In a brief consultation we can assess your situation and determine the best way to move forward.