The Supreme Court heard arguments in a relevant case, Tibble v. Edison International, earlier this year.
Plaintiffs claim that administrators of Edison’s retirement plan breached their fiduciary duties by offering plan participants retail-class mutual funds, when identical institution-class mutual funds were available at lower cost.
Observers think the Supreme Court will likely rule in favor of the plaintiffs, agreeing that plan fiduciaries have an ongoing responsibility to monitor their plan’s performance. If that happens, it could open the door to more fiduciary breach lawsuits.
Properly managing or handling other people’s retirement funds is a big responsibility. Actually, it’s not just a big responsibility…it’s a fiduciary responsibility. Not knowing exactly what that entails could land you in trouble.
What Does a Fiduciary Actually Do?
The Employee Retirement Income Security Act (ERISA), a federal law, governs employee benefit and retirement plans. Every written plan must name at least one fiduciary. This person or entity has control over the plan’s operation. A fiduciary differs from a typical manager in that the fiduciary must act solely in the best interest of the plan’s participants and their beneficiaries, with the exclusive purpose of providing benefits to them. In other words, fiduciaries must put participants’ interests ahead of their own.
ERISA requires a retirement plan fiduciary to have expertise in investments and other areas, such as plan management. Lacking that expertise, the fiduciary should hire someone with that knowledge to handle investment and other functions. Service providers can include investment managers, plan administrators and even investment advisors/educators.
Your responsibilities don’t end with hiring providers. An employer should establish a formal review process to review providers’ performance on a regular basis. One of a fiduciary’s most important duties is to monitor management fees and expenses to ensure they are reasonable.
The Importance of Fees
The plaintiffs in the Tibble case brought their lawsuit because their plan manager charged retail rates for managing mutual fund investments. However, the same mutual funds were available in the wholesale market, with much lower fees.
Even a one percent difference in fees can make a huge difference in an investment’s long-term performance. For example, let’s look at an employee who contributes $25,000 and makes no additional contributions over the next 35 years. If returns average 7 percent over that period and fees and expenses reduce average returns by 0.5 percent annually, the employee will end up with $227,000 at the end of the 35 years. At the same rate of return but with fees and expenses of 1.5 percent, that $25,000 will grow to only $163,000—a 28 percent difference.
Offering a 401(k) or other retirement plan is a big responsibility. Failing to fulfill those responsibilities could lead to liability, particularly if your negligence causes a financial loss for participants.
Taking certain steps can limit your liability. First, since your responsibilities require you to act prudently, document your decision-making process.
Second, consider setting up your plan to give participants control of the investments in their accounts. For this to work, participants must have a diversified portfolio of funds to choose from and the information they need to make a wise decision.
Finally, you can hire a service provider or providers to handle some or most of the fiduciary functions, setting up the agreement so that the person or entity then assumes liability.
Although it takes work and care, a solid retirement plan can make a powerful recruiting tool. It can make the difference in ensuring employees have a financially secure retirement…as well as helping you hire and retain qualified employees. For more information on setting up or administering a retirement plan, please contact us.