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Fiduciary Focus: Tibble v. Edison International and the U.S. Department of Labor’s Proposed Fiduciary Investment Advice Rules

Posted on Oct 21, 2015 by  in Changes in the Law: What You Should Know, In the News

Fiduciary, a term that is rarely used in everyday conversation, has been garnering a lot of attention in Washington, D.C. as of late. While fiduciary status has long been an important issue to retirement plan sponsors and service providers, with all three branches of government weighing in on fiduciary issues, now is a good time to take a fresh look at this topic.

In the retirement plan context, fiduciaries are people or companies that exercise discretion in administering the plan or managing its assets. Importantly, once a fiduciary, the person or company must act prudently in carrying out their duties and act solely in the best interest of plan participants and their beneficiaries. Common plan fiduciaries are the named plan trustees and the company sponsoring the plan; however, there can be others depending on the functions they perform for the plan.

In this post, we will take a look at some major developments regarding fiduciary status and fiduciary duties. The first section will provide an overview of the U.S. Department of Labor’s newly-proposed rules to change the definition of a fiduciary with respect to plan and participant investment advice. In the second part, we will look at the U.S. Supreme Court’s recent decision in Tibble v. Edison International which dealt with a fiduciary’s duties toward the plan and its participants.

The Proposed Fiduciary Definition Rules:

This past spring, the U.S. Department of Labor re-proposed an update to the 40-year-old regulatory definition of fiduciary as it relates to providing retirement plan investment advice. Similar rules were proposed back in 2010, but were ultimately withdrawn before they took effect due to heavy criticism and political pressure. However, the newly-proposed rules have received strong support from the Obama administration and are likely to be implemented in one form or another before the president leaves office in early 2017.  The new rules seek to make more investment advisors subject to the fiduciary investment advice standards by replacing the existing five-part test used to determine fiduciary status with the following four-part test: “(1) A person renders advice (a ‘recommendation’ regarding buying, selling, managing, hiring, managers/advisors for, rolling over, or valuing plan assets) to a plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner. (2) Pursuant to a written or verbal agreement, arrangement, or understanding (3) that the advice is given for consideration in making investment or management decisions, and (4) that the advice is individualized to, or that the advice is specifically directed to, the advice recipient.”  While on its own, the new definition may seem rather unremarkable, there are several significant changes from the existing rule.  Here are some of the notable changes:

  • The prior “regular basis” requirement is eliminated – one instance of advice is now enough;
  • The prior “primary basis” requirement is eliminated – the advice need only be a “consideration” in making an investment decision;
  • Fiduciary advice now specifically applies to IRAs, rollover transactions, and individual participants; and
  • Advice does not need to be “individualized,” just “specifically-directed.”

Importantly, there are several carve-outs from fiduciary status created by the rules for those providing investment education, platform providers, ESOP appraisers, employees of the plan sponsor, and salespeople for large plans.  Also, a prohibited transaction exemption (the “Best Interest Contract PTE”) was proposed along with the rules that would allow a fiduciary investment advisor to receive variable compensation if he or she acknowledges his or her fiduciary status in writing, commits to acting impartially, and provides appropriate disclosures to the plan sponsor and the U.S. Department of Labor (including having an internet website that discloses its fees).

Despite President Obama’s support, the changes proposed in the new rules are likely to face strong opposition from some members of Congress and advocacy organizations.  Opponents of the proposed rules argue that the changes are overreaching and may serve to impede some participants’ ability to access much-needed investment assistance.   Currently, there are efforts in the House and Senate that seek to deny funding needed to implement the new rules or delay their effect until 60 days after the Securities and Exchange Commission has issued its own rules on the subject. However, unless the U.S. Department of Labor and the White House are persuaded to change course, it seems likely that some version of the proposed rules will move forward.  A public comment period for the proposed rules ended on July 21.  In early August public hearings were held to discuss the impact of the proposed rules followed by another comment period which has now closed.  Once finalized, the rules will be published in the Federal Registrar and will become enforceable eight months after publication.  In any event, it is likely that it will be at least a year before the rules are fully implemented.

Tibble v. Edison International:

On May 18, 2015, the U.S. Supreme Court decided Tibble v. Edison International, a case that deals directly with plan fiduciary issues; specifically, the duty to select and monitor plan investments. In Tibble, the Court addressed the issue of whether ERISA’s statute of limitations barred claims that the plan fiduciaries breached their fiduciary duty by failing to remove several retail-class mutual funds from the plan’s lineup.

The plaintiffs in the case, participants in an employer-sponsored retirement plan, claimed that the company and several other plan fiduciaries breached their fiduciary duty by including several retail-class mutual funds in the plan’s investment lineup when lower-cost institutional-class funds were also available. The funds in question were initially added to the plan’s lineup in 1999, more than six years before the lawsuit was filed by plan participants in 2007. Due to the amount of time that had passed since the funds were initially selected, the fiduciaries argued that the claims should be dismissed because they were time-barred by ERISA’s six-year statute of limitations. The District Court and the Ninth Circuit Court of Appeals both agreed with fiduciaries’ argument. The Ninth Circuit reasoned that because the plaintiffs failed to establish that a significant change in the circumstances had occurred since the funds were initially selected in 1999 the claims should be dismissed as untimely.

On review, the U.S. Supreme Court determined that the lower courts had erred in dismissing the claims. Using established trust law as reference, the Court held that in addition to the duty to properly select plan investments, fiduciaries have an ongoing duty to monitor and review those investments and remove funds that are no longer prudent investment options.  The Court concluded that failure to remove imprudent investments could constitute a breach of fiduciary duty.  The Court remanded the case back to the Ninth Circuit to reconsider whether a breach of the fiduciary duty to monitor plan investments had actually occurred.

Closing Thoughts:

Both the U.S. Supreme Court’s decision in Tibble and U.S. Department of Labor’s proposed fiduciary definition rules highlight the importance of being aware of fiduciary issues involving retirement plans.  We know that fiduciary issues continue to be a top priority for the U.S. Department of Labor and, as illustrated in Tibble, they are likely to be an area of interest for plan participants as well.  Plan sponsors should take the time to identify the fiduciaries of their retirement plan and ensure that each fiduciary acts prudently in carrying out his or her duties and acts solely in the best interest of plan participants and their beneficiaries.

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New IRS Guidance on Accepting Rollover Contributions

Posted on Oct 02, 2014 by  in Changes in the Law: What You Should Know

Qualified retirement plans can generally accept rollovers that were distributed from other eligible retirement plans such as another 401(k) plan, 403(b) plan, governmental 457(b) plan, or IRA. However, certain distributions such as required minimum distributions, hardship distributions, and distributions from an inherited or Roth IRA cannot be rolled into a qualified plan. Prior to accepting [...]

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Posted on Apr 08, 2014 by  in Changes in the Law: What You Should Know, Retirement Plans for Business

The IRS released new regulations in November of last year that changed the rules for suspending safe harbor contributions during the middle of the plan year.  In general, employers cannot make changes that affect the safe harbor contribution during the plan year; such changes must be made before the beginning of the plan year in [...]

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Reaction to the PBS Frontline show “The Retirement Gamble”

Posted on Apr 25, 2013 by  in In the News, Retirement Plan Fees, Retirement Readiness

I dutifully watched the PBS Frontline report “The Retirement Gamble” last night.  I am a regular PBS viewer and I know that Frontline is a reliable source for good information, so it was with some trepidation that I anticipated the airing of this particular episode.  I say this because the advance reports on the show [...]

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Impact of Fee Disclosure: A success, a failure, or too soon to tell?

Posted on Mar 08, 2013 by  in In the News, Retirement Plans for Business, Retirement Readiness

Over the last several years, retirement plan sponsors and their service providers have spent a lot of time preparing to comply with the DOL’s participant and service provider disclosure rules that became effective in 2012.  Now that the rules have been effective for the better part of a year, many of us in the retirement [...]

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Save My 401(k)

Posted on Dec 21, 2012 by  in Changes in the Law: What You Should Know, In the News, Retirement Readiness

The 401(k) plan is the most successful savings program in the history of our country.   People who have access to an employer-sponsored retirement plan are 15 times more likely to save for retirement than those working for employers without one.  No other alternative even comes close to the level of participation the 401(k) plan has [...]

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It is National Save for Retirement Week!

Posted on Oct 24, 2012 by  in Retirement Life, Retirement Readiness

For those of you who have read Retirement Voice in the past, you know that saving for retirement is something that we care deeply about and think about all year long.  However, for those of you who do not have the luxury of thinking about retirement savings as part of your daily lives, National Save [...]

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401(k) Accounts Increase Personal Wealth

Posted on Oct 16, 2012 by  in 401(k) Retirement Planning, In the News, Retirement Readiness

The title of this post probably sounds like a statement of the obvious to many who read this blog.  Even so, I recommend you read a recent EBRI article that discusses an EBRI Issue Brief that analyzes information from the Survey of Consumer Finances.  In my opinion this information provides clear support for the value [...]

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Participant Disclosure: Helpful or Hurtful?

Posted on Aug 14, 2012 by  in Retirement Plans for Business, Retirement Readiness

Having just finished creating documents that will help our clients comply with the DOL’s soon-to-be effective participant disclosure rules, I have become seriously concerned that 401(k) participants will not actually benefit from receiving the information required by these regulations.  In theory, I think that the desired goal of the regulations is noble: to give participants [...]

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Must Participants be Protected from Themselves?

Posted on Aug 03, 2012 by  in 401(k) Retirement Planning, Retirement Readiness

I just read an article that discusses the idea of “Protecting Participants from Themselves.” The article is good reading, but I wanted it to go a bit further with this subject.  It brings to mind some recent articles related to the “inadequacy of 401(k) plans” and the “fairness” of the 401(k) system. Employers that sponsor [...]

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