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High Court case could spawn more 401(k) suits

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in Compensation and Benefits,Human Resources

The Supreme Court has ruled that retirement plan fiduciaries have an ongoing duty to monitor all 401(k) plan assets and sell off under-performing securities and funds. The Justices unanimously ruled May 18 that the Employee Retirement Income Secu­rity Act (ERISA) requires prudence not just when fiduciaries first buy an asset, but for as long as that asset is held by the retirement plan.

The opinion in Tibble v. Edison Inter­­national (No. 13–550, U.S. Supreme Court, 2015) could encourage more 401(k) participants to sue plan administrators and employers for lax oversight of their investments.

The complex case boiled down to excessive fees. The key question: Did Edison International’s plan breach its duty when in 2002 it bought shares in three relatively high-commission funds to add to a portfolio that was established in 1999? The plaintiffs, current and retired employees of the California utility company, argued the plan should have purchased less expensive wholesale funds instead.

The Supreme Court agreed.

“ERISA’s fiduciary duty is derived from the common law of trusts, which provides that a trustee has a continuing duty—separate and apart from the duty to exercise prudence in selecting investments at the outset—to monitor, and remove imprudent, trust investments,” wrote Justice Stephen Breyer.

Legal experts said the principles laid out in the Tibble decision are likely to affect future ERISA cases. Justice Breyer’s opinion stated that retirement plan trustees “must systematically consider all the investments of the trust at regular intervals to ensure that they are appropriate.”

Commissions and fees associated with 401(k) and other retirement plans are coming under increasing scrutiny.

The Department of Labor, which enforces ERISA, has proposed new rules that would crack down on conflicts of interest created when fiduciaries’ compensation is based on commissions received in exchange for recommending particular investments.

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