Compliance January 2, 2015

Supreme Court Sets Date for Tibble Arguments

The United States Supreme Court will hear arguments in the closely watched 401(k) fee litigation case Tibble v. Edison near the end of February.
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An updated docket sheet on the U.S. Supreme Court website shows Tibble v. Edison will be argued on February 25, 2015.

The case is considered by industry observers to be the first “excessive fee” litigation to reach the country’s top court. In a 2014 interview with PLANADVISER, the plaintiffs’ attorney in the case said Tibble v. Edison is tremendously important for the future of the retirement planning industry.

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“The question before the Supreme Court is whether plan sponsors can get permanent immunity on an imprudent investment decision, for all time, based on the limitations period [in ERISA],” says Jerry Schlichter, of the law firm Schlichter Bogard and Denton, who will argue for plaintiffs in the class action. “The lower courts have decided that, even if a plan has been shown to include a fund that is known to be imprudent, as is the case here, it can be protected from liability by the ERISA six-year limitations period. That’s the question the court has to decide whether to overturn—whether it’s appropriate to give sponsors permanent immunity from liability once the investment that is being challenged has been on the plan menu for six years.”

According to the Supreme Court’s website, justices will limit their review of Tibble to the following question: “Whether a claim that ERISA [Employee Retirement Income Security Act] plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U. S. C. §1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.”

As part of that question, the Supreme Court must also decide if the so-called “Firestone deference” (as established in the high court’s 1989 decision in Firestone Tire & Rubber Co. v. Bruch) applies to fiduciary breach actions under 29 U.S.C. §1132(a)(2), where the fiduciary allegedly violated the terms of the governing plan document in a manner that favors the financial interests of the plan sponsor at the expense of plan participants.

During a recent conference call, one ERISA specialist said the real issue at hand in Tibble v. Edison has less to do with the strength or weakness of the ERISA limitations period than many in industry and media have suggested. As Fred Reish, an attorney with Drink Biddle & Reath and leader of the firm’s ERISA practice, explains, “the true issue before the Supreme Court is whether there is a discreet and ongoing duty to monitor investments that is distinct from the initial duty to select.” 

“The trial court and the 9th Circuit, consistent with other appeals courts, ruled that once the six-year window has gone by from when an investment was selected, there is no continuing duty to monitor,” Reish explains. “As the decision stands, the duty to monitor doesn’t start that limitation period again each year, it doesn’t keep rolling that way. So once six years go by from the initial fund selection, the fiduciaries are safe from plaintiffs seeking damages.

“If this goes if favor of the defendants it will eliminate or substantially reduce the ongoing duty to monitor,” Reish notes. “In this sense, again, the question before the Supreme Court is not really a statute of limitations question, as some have interpreted. The real question is whether there is an independent duty to monitor that has its own six-year statute of limitations, such that every year the failure to monitor starts a new limitation period, and the sponsor can then be sued on at any point in the next six years once a failure to monitor has occurred.”

Reish urges both the plan sponsor and adviser communities to “watch this very carefully, because it could diminish the perceived value of advisers if the Supreme Court says there is no legal separation between the ‘ongoing duty to monitor’ and the original decision to select.”

Additional coverage of Tibble v. Edison, including more background and interpretation from industry experts, is here.

Compliance January 2, 2015

New Advocate at PBGC Suggests Action on Pension De-Risking

The new PBGC Participant and Plan Sponsor Advocate has released her first annual report of issues.
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“[P]ension de-risking may be the greatest threat to PBGC’s single-employer program, as it has the potential to substantially reduce PBGC’s premium base,” says the Pension Benefit Guaranty Corporation’s (PBGC) Participant and Plan Sponsor Advocate, Constance Donovan.

In her first annual report in the new position, Donovan says plan sponsor trade groups tell her pension plan de-risking is the most important pension issue on the minds of business executives in some of the largest corporations, and rising PBGC premiums are contributing to employer decisions to de-risk and exit the defined benefit system. Participant advocacy groups have other concerns about de-risking and the role the PBGC can play in mitigating this trend. “PBGC needs to be a part of that conversation so the Corporation can consider what changes, if any, they may want to make,” she writes.

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She also states that several participant and retiree organizations have questions about the increasing offers of lump sums and annuities to retirees and terminated vested participants in defined benefit plans that will remain ongoing. Both participant groups and plan sponsor groups have offered a variety of policy recommendations and requests for guidance. Donovan wants to help raise the questions of participants to the level needed to get practical information out in a timely manner. She says she believes educational materials exist which could go a long way in assisting participants facing major changes in their retirement outlook.

According to Donovan, participants insist that while de-risking may reduce certain sponsor risks, it simultaneously raises and transfers risk to participants. Some groups have called for a moratorium on such transactions until regulatory guidance can be issued addressing risks they see to the participants leaving the plan, and perhaps participants in plans that continue normal operations. “I want to highlight the importance of these issues at the highest levels,” Donovan says.

Overall, Donovan conveys that communication is an issue between the PBGC and plan sponsors and participants. She calls for a less adversarial view between sponsors and participants and the agency. Other issues she recommends conversation about are plan sponsor views of the PBGC’s guidance on so-called “shutdown enforcement” and the handling of plans that are designated as “church plans” by the Internal Revenue Service. Specifically, Donovan notes that the Pension Rights Center feels strongly that PBGC should not return premiums paid by church plan sponsors when they seek to undo Employee Retirement Income Security Act (ERISA) coverage after many years of insurance protection from the PBGC by applying for church-plan status.

Donovan’s report is here.

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