What the Supreme Court Ruling Means to Fiduciaries

When it comes to your company’s retirement plan, a process of prudence is the surest way to protect you and your employees.

What is a process of prudence? It’s a formal plan to ensure you meet your fiduciary responsibilities, as defined by ERISA and the Department of Labor. Part of those fiduciary duties call for you, as the plan sponsor, to select investments wisely – with the help of financial experts if you lack that expertise yourselves – as well as to document how you made those decisions.

Here’s why this is so important: In May, the U.S. Supreme Court ruled unanimously that individual claims regarding imprudent investments can be brought against companies, even if those investments were selected outside of ERISA’s six-year statute of limitation rules.

In Tibble vs. Edison International, individual beneficiaries of Edison’s 401(k) plan filed a lawsuit against the company for breach of fiduciary duties. The plaintiffs wanted to recover losses from mutual funds the company added to its 401(k) plan back in 1999 and 2002.

The Edison employees claimed that the plan’s fiduciaries imprudently selected six higher priced retail-class mutual funds as plan investments, when identical institutional-class mutual funds were available at a lower cost.

Employees, quite rightly, expect the plan sponsor of their company’s retirement plan to select funds that offer the best value in terms of growth potential as well as associated fees. And while no one can predict the market, it is the fiduciary responsibility of the plan sponsor to review and eliminate funds that have excessive fees if better options are available.

Moving Forward: 8 Essential Elements of Plan Success

Right now you may ask yourself whether this Supreme Court ruling affects you. If you’re the plan sponsor of your company’s retirement plan, then the answer is YES, because you have fiduciary responsibility.

Both the Department of Labor and ERISA expect you to meet very specific elements to ensure your plan has the opportunity to succeed. In fact, there are eight essential elements for success, from documenting goals and objectives of your plan to understanding plan expenses.

If you’re not 100% confident you are meeting these elements, then you need to focus on establishing a process of prudence. Even if you are confident you fully meet your fiduciary responsibilities, it’s still advisable to review your process and funds each year to ensure compliance, since regulations change frequently.