The trouble with Tibble

Editor: Michael D. Koppel, CPA/PFS/CITP

Trustees oversee Sec. 401(k) and similar retirement plans. Those trustees are responsible for determining the investment options available to plan participants. A recent decision by the Ninth Circuit, on remand from the Supreme Court, demonstrates that trustees need to constantly evaluate whether the options selected are in the best interest of the plan participants.

Tibble revolved around the straightforward question of whether the trustee is responsible for constantly monitoring and reviewing investments available to plan participants. The plaintiffs, beneficiaries of an employer-sponsored defined contribution Sec. 401(k) plan, argued that the plan sponsor breached its fiduciary duties by offering “higher priced retail-class mutual funds as Plan investments when materially identical lower priced institutional-class mutual funds were available (the lower price reflects lower administrative costs).” The plan was governed by the Employee Retirement Income Security Act (ERISA). Because this was an ERISA case, there was a six-year statute of limitation, and at least three of the funds in dispute were added to the plan more than six years before the complaint was filed.

The case ended up before the Supreme Court, which held that the litigation regarding those funds was not time-barred because “a fiduciary’s allegedly imprudent retention of an investment” is an event that triggers a new limitation period (Tibble v. Edison International, 135 S. Ct. 1823, 1826, 1828-29 (2015)). The Court looked to the common law of trusts, from which ERISA’s fiduciary duties are derived, and found that “[u]nder trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones . . . separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset” (id. at 1828).

The Court also determined that a “trustee cannot assume that if investments are legal and proper for retention at the beginning of the trust, or when purchased, they will remain so indefinitely” (id., quoting Hess, Bogert, and Bogert, Law of Trusts and Trustees §684, 145-46 (3d ed. 2009)). Instead, the Court said, “the trustee must ‘systematic[ally] conside[r] all the investments of the trust at regular intervals’ to ensure that they are appropriate” (id., quoting Bogert 3d §684, at 147-48).

On remand, the Ninth Circuit ordered a new trial, noting that “[i]n fulfilling his duties, a trustee is held to ‘the prudent investor rule,’ which requires that he ‘invest and manage trust assets as a prudent investor would,’ that is, by ‘exercis[ing] reasonable care, skill, and caution,’ and by ‘reevaluat[ing] the trust’s investments periodically as conditions change’ ” (Tibble v. Edison International, No. 10-56406 (9th Cir. 12/16/16) (en banc) (slip. op at 19, quoting Bogert 3d §684).

Tibble stands for the proposition that the trustees have a responsibility to constantly monitor whether lower-cost options are available to plan participants. The case makes it plain that a failure to make these options available opens the trustees to personal liability. The next question is whether any insurance coverage is available for this risk. The author inquired with several insurance agencies that cover businesses. The universal answer was, “We don’t know, but probably not.”

EditorNotes

Michael D. Koppel is a retired partner with Gray, Gray & Gray LLP in Canton, Mass.

For additional information about these items, contact Mr. Koppel at 781-407-0300 or mkoppel@gggcpas.com.

Unless otherwise noted, contributors are members of or associated with CPAmerica International.