U.S. Supreme Court ERISA Plan Rulings Favor Retirement Investment

The future of retirement savings is looking brighter following a recent U.S. Supreme Court ruling on ERISA-protected plans that may improve employee investment options.

 

Tibble vs. Edison

This May in Tibble vs. Edison International, the Supreme Court unanimously ruled that it is insufficient for employers to only set up a 401(k) with investment options. Fiduciaries must also continue to monitor those investments for any changes.


“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, who delivered the opinion for the court.


Background

The case began when Tibble plaintiffs, on behalf of Edison International’s plan beneficiaries, claimed that the company violated ERISA’s fiduciary duty of prudence by offering more expensive “retail class” rather than “institutional class” shares of mutual funds.

 

Impact

 

By clarifying fiduciary duties, Tibble vs. Edison exposes how the interests of plan participants are not protected. The court decision reveals that fiduciary breaches, which can be filed up to six years after the last violation, can have major consequences.

 

In terms of litigation, plan fiduciaries may bear damages and penalties as a result of neglecting to monitor investment options and, if necessary, removing imprudent ones. The potential liability for violating fiduciary duties can be compounded over time from investor fees and expenses.

 

Separate from that decision, the U.S. Department of Labor recently proposed a rule to protect 401(k) and IRA investors by mitigating conflicts of interest in the retirement investment marketplace, which results in annual losses of about $17 billion per year for investors, according to a White House Council of Economic Advisers analysis.

 

In June 2014 in Fifth Third Bancorp vs. Dudenhoeffer, the Supreme Court unanimously decided that Employee Stock Ownership Plans (ESOPs) were also subject to the ERISA fiduciary standard, mandating that employers only offer stock in the plan that is a good investment for employees.

 

The bottom line is that the Supreme Court’s verdicts in these two recent ERISA cases make it clear that companies must act in the best interest of plan participants when providing financial options. 

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