Here’s the scenario: you started a small business that has grown leaps and bounds. You want to reward and retain employees, so you start beefing up their benefits. You start a 401(k) or other defined contribution plan (“pension plan”). The provider or advisor provides you with a wide variety of different mutual funds with varying investments and degrees of risk. You let the employees pick their investments, so they can decide the level of risk they want to take.
Your business continues to grow, adding more employees and, therefore, more participants to the pension plan. Your company is still on the move, and you spend your time on its growth and day-to-day matters. Fifteen years go by; you haven’t paid much attention to the pension plan, and your provider or advisor hasn’t let you know that anything needs to be changed. Everything looks promising.
Then, out of nowhere, you get sued by employees – both former and existing – in a class-action lawsuit. They accuse you, as the pension plan sponsor, of violating your fiduciary duty. You are stunned, as the returns on the pension plan were generally okay. However, the administrative costs were high, affecting the return. You find out that you should have been monitoring these costs as the plan sponsor. You call your provider or advisor and ask if their insurance carrier would defend the lawsuit. They won’t; they tell you that as the plan sponsor, it is you or your company that is responsible. Therefore, they cannot provide a defense or pay for the liability that may incur.
This scenario highlights the lessons we are learning from the recent U.S. Supreme Court case Tibble v. Edison. First, ERISA – the law covering pension plans – has a six-year statute of limitations. However, although the investments were set up 15 years ago and you haven’t changed anything, as the plan sponsor, you have a continuing duty to monitor the investments and ensure that they are prudent and cost-effective. Secondly, your company is the plan sponsor, so it is your company that is liable, not your advisor.
So, what do you do? You’ll need to monitor constantly and document your decisions as to why the investments were selected. For most of us, it’s because our provider or advisor selected them for us, but that is not a good enough reason. The U.S. Supreme Court’s decision tells us that the sponsor of the plan has an ongoing fiduciary duty to monitor investments.
You can push the liability onto the plan’s provider or advisor if they are an ERISA 3(38) fiduciary. That makes them responsible for selecting, replacing and monitoring the pension plan. Under ERISA law, the provider – you and your company – are relieved of fiduciary liability if you utilize a 3(38) investment fiduciary.
The New Year provides the perfect opportunity to check with your provider or advisor to see if they are a 3(38) fiduciary. If not, you will need to weigh the risk of continuing with that advisor or moving the pension plan. It’s important to note that although the 3(38) fiduciary may relieve you of the liability, they will do so at a price. If the cost is too high, sit down with your provider or advisor and review the investments. Perhaps reduce duplication in the same investment categories to reduce the burden of monitoring. At the end of the day, with the help of your provider or advisor, create a memorandum as to why you kept, removed or added investments with particular attention on the administrative costs.
As the saying goes, “No good deed goes unpunished.”