The role of Plan Fiduciary is a critical one for Registered Investment Advisors and Corporate Trustees – entailing great responsibility when these firms help clients select and maintain their Plan’s investment menu. And that job is now getting more scrutiny by the highest court in the land.
On February 24, 2015, the U.S. Supreme Court (SCOTUS) heard arguments in the Tibble vs. Edison International case. One relevant aspect of this case deals with the requirements of the Fiduciary in selecting and monitoring the funds made available to participants. The DOL submitted an amicus curiae in support of the petitioners, stating the plan Fiduciary had an ongoing duty to monitor the funds made available to participants. The Fiduciary initially implemented retail shares instead of institutional shares. Institutional share classes are typically made available to larger retirement plans and are less expensive than their retail share counterparts.
The Fiduciary serving this plan may have reviewed the retail funds offered in 1999, but did not inquire for over ten years as to whether those retail funds could be replaced with institutional mutual funds at a substantial fee savings to the participants. The lower courts felt the Fiduciary fell short on the critical component of reasonable reliance, or the requirement to assess the advice received and question the methods and assumptions that do not make sense. As a result, the fiduciary did not exercise the care, skill, prudence and diligence under ERISA in the selection of retail mutual funds.
While the outcome of this case is still to be determined by the SCOTUS, it is clear the court takes the role of Fiduciary very seriously and the Fiduciary’s awareness of such fees highlights their responsibility to the participants of such plans. Each Fiduciary must review the 408(b) (2) notice to determine whether the charges are reasonable and demand the notice from service providers who fail to provide one. A failure to follow this process violates the DOL regulations and may trigger a prohibited transaction.
As you can see from this and other court cases, fees from such programs are now under the microscope and being scrutinized closely. Are the plan sponsor clients you service prepared to respond to a reasonable fee challenge? A fiduciary may need to retain an independent opinion as to whether the fees being charged for a given set of services are reasonable. Through various solutions we have in place, BPAS can help clients respond to this new landscape – helping them receive a high level of service at reasonable and competitive fees.