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10 Unexpected Changes Tibble Really Brings to 401k Fiduciary Providers and Plan Sponsors

May 27
00:57 2015

Highly anticipated, the Supreme Court’s unanimous judgment in the Tibble v. Edison case generated less fanfare than one might have expected. Ironically, that’s probably not the only unexpected outcome from this decision. Indeed, one 673264_85522744_gavel_stock_xchng_royalty_free_300might call this case just the “Tibble” of the iceberg. “The employer-based retirement plan model has been full of flaws for years, and this ruling is a step in the right direction,” says Chris Markowski a radio personality and founder of Markowski Investments located in Tampa, Florida. “Tibble vs. Edison is just one example of the flurry of recent high profile lawsuits in the corporate retirement space.”

Though the ruling did not surprise, those within the industry see reverberations resulting from verdict. “The Supreme Court’s 9-0 ruling reversed/rejected the 9th circuit’s ruling that there was a 6-year statutory limit under ERISA for a claim involving a plan investment that was chose outside this window,” says Jeff Snyder, vice president at Cammack Retirement Group in New York City. “This is precedent setting as it reaffirms or supports the notion that there is a continuing duty under ERISA to monitor and remove imprudent investments.”

On the other hand, the echoes from this ruling may surprise. We’ve accumulated ten potential candidates for what might be call “unexpected” changes that Tibble v. Edison will spawn. In honor of his retirement, we’ll do this David Letterman style – a good old fashioned top ten countdown.

#10: The most unexpected impact is… nothing changes: At its most basic, the Supreme Court merely removed a technicality that was preventing a portion of this case from proceeding. The Court made no comment as it pertains to the plan sponsor’s actual fiduciary duty. “Perhaps the most unexpected consequence of this ruling will be the lack of a ground breaking consequence,” Andrew S. Zito, Executive Vice President LAMCO Advisory Services located in Lake Mary, Florida. “The ruling itself did not actually change a sponsor’s fiduciary obligation to monitor the investments in their plans on an ongoing basis – it simply reaffirmed it. The Supreme Court did not rule specifically on how deep, or how often, fiduciaries should monitor their investments to satisfy their responsibility; they deferred this back to a lower court. So there really are no new ‘To Do’ list items for sponsors and fiduciaries that weren’t there before the ruling – but there should be an enhanced sense of urgency to make sure the old ‘To Do’ list is completed.”

#9: You’re going to see a lot more dead trees: The lack of a statute of limitations means plan sponsors never having to say “you’re sorry,” mostly because plan sponsors won’t get the chance. To compensate for this, plan sponsors will need to gather, keep, and maintain – for a much longer time than before – due diligence data concerning the plan’s holdings. Lori Atkin, counsel at Reed Smith LLP in Philadelphia, Pennsylvania. and is a member of the firm’s Tax, Benefits & Wealth Planning Group, says, “Service providers may need to provide enhanced and more frequent information (such as investment analysis and reasonableness of expenses) to plan sponsors or the plan fiduciaries responsible for decisions regarding investment alternatives, such as an investment committee, (hereinafter called ‘investment fiduciaries’), so the fiduciary duty of monitoring investment alternatives can be met.”

This, in combination of the DOL’s pending rule, will place more pressure on 401k plan vendors, too. “Service providers, particularly those who may rely more on retail investment offerings will need to revisit how these offerings are disclosed and the information that is provided to the participants in the Plans that are serviced, to show how these investment offerings would truly be in the participant’s best interest,” says Ken Jacoby, Retirement Services Manager at Alcott HR in Farmingdale, New York.

#8: There will be increased demand for 3(38) advisers: One of the things Tibble teaches us is that the plan sponsor retains liability where the non-fiduciary service provider doesn’t. Another lesson, as evidenced by #9 on our list, is the need to continually monitor the plan. This will dramatically change the way some plan sponsors view their plan. Stuart Robertson, President of ShareBuilder 401k based in Seattle, Washington, says “Plan sponsors should remember that they shouldn’t set up plans and walk away. With the new ruling from the Supreme Court, it is critical they check in and review the plan benefits regularly. They should also form investment policies and review options on a regular basis to be thinking of the ‘best interest’ for employees. If a plan sponsor is not able to stay involved and provide support to employees, there are service providers already in the market taking on fiduciary and other responsibilities for them at a low cost. This helps take the burden off of the sponsor while leveraging experts in the field with a reputation for handling this type of responsibility on a daily basis.”

How does a plan sponsor get around this bureaucratic dilemma? The answer is to hire the right kind of professional. “Class action litigation will continue and some smaller employers may decide that sponsoring a retirement plan is not worth the personal liability,” says Jason Woon, Founder of Main Street 401(k) L3C based in the San Francisco/Bay Area. “As Plan Sponsors realize the ongoing monitoring nature of their fiduciary duties, many will outsource to ERISA 3(38) advisers in order to completely transfer this risk.”

A 3(38) fiduciary is a specialized provider that offers plan sponsors an excellent opportunity to delegate key liabilities. Judson Stein, a partner in the Newark, New Jersey office of Genova Burns, says, “A prudent plan sponsor will likely outsource the selection, monitoring, and replacement of plan investment options to a 3(38) fiduciary; which is a registered investment adviser, bank, or insurance company that is engaged to manage the Plan’s investment process and, under ERISA, relieves the plan sponsor of fiduciary responsibility for the investment decisions made by the investment professional.”

#7: Revenue sharing will be treated very differently, if it exists at all: In the old days, service providers used revenue sharing as a way to offset fees. Plan sponsors often weren’t even aware of these arrangements and may have been under the impression they weren’t paying the provider. Today, that view is changing (see “12b-1 Fees/Revenue Sharing Add to 401k Plan Sponsor Fiduciary Liability Woes,” FiduciaryNews.com, March 24, 2015). Since revenue sharing is among the suspect fees in looking at different share classes, the Tibble ruling could add further pressure to eliminate those type of “back-door payments.” Woon says, “Revenue sharing will continue to reduce as a result. In addition, recordkeepers that can credit any revenue sharing monies directly back to the participant who generated those credits will have some technological advantages in the short term.”

#6: Institutional class and low-cost index funds will dominate: “It is likely the trend toward more institutional funds and less expensive index funds will continue to accelerate,” says Woon. If we look at the impact of Tibble, and where the case has been prior to the Supreme Court ruling, we see plan sponsors being held liable for failure to select lower cost class shares. In most cases, these will be the institutional class of shares for any particular fund. In a similar sense, funds with identical portfolios will be subject to the same “low fee” hurdle. This means when a plan sponsor selects index funds for the plan’s investment menu, those with the lowest costs will prevail.

This puts pressure on both the 401k plan sponsor and professionals offering fiduciary facilities. “Service providers will have to be even more cost conscientious in structuring and/or choosing the investment funds that are made available for 401k investment options,” says Stein. “If the expenses of a fund are more than others, there better be a very good reason for it.”

Jonathan E. Baltes, Chief Executive Officer at QP Steno located in Fort Wayne, Indiana, agrees. He says, “We are going to see a mad scramble by service providers to make sure that their clients are in the lowest share class appropriate for the revenue structure in place. Fund evaluation procedures and tools will start to give consideration to share class.”

#5: A “Race to the Bottom” on fees will lead to poorer investment performance: There is, of course, a dark side to this fee consciousness. Fred Reish has called this the infamous “race to the bottom.” It’s a vicious circle that drives fees ever lower. At some point, though, such extremism leads to unfortunate results. “Increasing cost pressures imposed by plan sponsors on fund managers might lead funds to be less willing to pay top dollar for investment talent and resources; thereby depressing investment returns and, therefore, 401k performance,” says Stein.

#4: You’re going to see a lot fewer investment options: OK, so here’s a totally unexpected but quite logical consequence of the Tibble decision. If every additional fund on the 401k plan’s menu of investments increases liability to the plan sponsor, the easiest way to reduce that risk is to simply decrease the number of options. Atkin says, “Investment fiduciaries may decide to reduce the number of available investment alternatives to minimize the litigation risk that an available investment alternative is not ‘prudent.’”

#3: More law suits, but not just for the reasons you think: Markowski summarizes popular opinion when he says, “This will make it easier for employees to push lawsuits over excessive fees and underperforming funds. While there have been many previous lawsuits, this one carries a significant amount of weight in making it easier for investors to sue over bad 401k plans.”

The most significant single item the Tibble ruling speaks to is the ability for plan sponsors to “run out the clock” on their fiduciary duty. “The Supreme Court’s Tibble decision will have ripple effects among 401k service providers,” says Jacoby. “First and foremost because providers, as well as Plan Sponsors, will no longer be able to stall claims in the hopes of running out the clock under ERISA’s 6 year statute of limitations. The most immediate impact of the Tibble decision is to re-open many cases that may have previously been dismissed because the complaints fell outside of the 6 year statute of limitations. This can be a significant windfall for plaintiffs and their attorneys. Not that any Plan Sponsor or service provider should be hiding behind the time constraints.”

With the Supreme Court’s decision, there’s nowhere to run for plan sponsors. Bill Peartree, Principal and Director of Retirement Services at Barney & Barney Insurance Services LLC in San Diego, California, says, “Going forward, Plan sponsors and fiduciaries will not be able to escape potential liability if they are not acting prudently and in the best interest of plan participants and/or their beneficiaries. Acting prudently in selecting investment alternatives but looking beyond just investment performance will prove crucial.”

Not only is there no place to hide, but the fiduciary meter runs continually. “Advisers who set it and forget it will be sued; record keepers for advisers who bundle the compensation, and then set it and forget it will likely be sued under the ‘deep pocket’ theory,” says Joe Gordon, Partner at Gordon Asset Management, LLC in Durham, North Carolina.

While all the focus has been on the past indiscretions of plan sponsors, there’s a lingering liability that looms in the future. Peartree says, “Regarding fees, this continues to be the basis for many lawsuits, and we are on the front end of the movement. There are nearly 10,000 baby boomers retiring every day. As they start running out of money, you can be certain they will start digging into the fees they’ve been paying and raising Cain with their prior employers. Additionally, there are a handful of class action attorneys supporting a nice lifestyle after settling excessive fee lawsuits.”

Like other cases, though, in the end, the Tibble verdict provides a foundation for future court cases. “This decision will lay the groundwork for the next round of ERISA litigation,” says Baltes. “If you think about the two distinct aspects of this case (fees and the duty of ongoing monitoring), this could be the last piece that the attorneys need to come after the investment community. The only difference between share classes is the expense structure. The portfolio and services are the same.”

#2: There will be fewer 401k Service Providers: There’s another effect of the “race to the bottom” that is worth considering. “Everything else being equal, you should have the cheapest arrangement available,” says Baltes. “However, if you turn that thought around, the plan sponsor now has a duty to monitor that relationship (fees v. value) on an ongoing basis. As a function of the fee monitoring, the plan has an obligation to negotiate fees commensurate with the services provided and utilized. As an example, a recordkeeper who charges a higher wrap fee than another does to cover upfront compensation to a financial advisor for the additional work involved in switching providers may cause issues under this new thinking. While the extra fee may be acceptable in the first year, is it still applicable in year seven of the contract as the insurance company is still amortizing the expense? Another example: When a TPA says that he showed value through plan design several years ago, that value and corresponding expense may not necessarily carry over. Hence, higher expenses may not be warranted. Service providers will absolutely need to start documenting the work that they perform for two reasons. First, the plan sponsor is culpable for fees paid without an appropriate corresponding service model. Equally important, though, as plan sponsors begin to try to monitor this balance between fees and service, covered service providers are going to need documentation to demonstrate work for the plan. Automatic features continuing to erode at the traditional value proposition of many service providers will further complicate this new paradigm.”

Squeezing fees results in squeezing profits, and squeezing profits starts to cut into business sustainability. Tony Hellenbrand, Owner of Hellenbrand Financial in Green Bay, Wisconsin, says, “I think 401k service providers will see tremendous increases in their cost structure (especially errors & omissions insurance and other compliance costs). I think this could be a ‘straw that broke the camel’s back’ to force some marginal providers out of the space entirely.”

#1: There will be fewer 401k Plans: How the culmination of all these consequences impacts 401k plan sponsors may be the most ironic consequence of all. Hellenbrand says, “I want to be clear that I am fully in favor of holding advisers to a higher standard. I think more rules have unintended consequences that can actually hurt clients. If 401k service providers see gigantic cost increases and leave the space, it leaves less competitors with the same amount of clients. I think there’s potential that the [Tibble] decision could result in higher costs and worse overall plans especially on the small/micro end of the plan spectrum as the fewer remaining competitors (and don’t forget their lower margins) are fighting over the larger plans.”

“While a number of lawyers are sure to benefit from the ruling, plan sponsors and participants should be a bit concerned,” says Markowski. “The ruling does help protect employees from high-fee, low-performance 401k plans, but it may also help take employer-sponsored plans away from them completely. In the wake of this ruling, we’re sure to see a number of employers eliminate their plans altogether, as the added liability may not be worth the hassle. As employers start dropping their 401k offerings, many more consumers could be left to fend for themselves when it comes to retirement.”

How many of these “Top Ten Unexpected Changes” will come to fruition remains to be seen. What we can be certain of is the story of Tibble is not over. Peartree says, “The Tibble case has been ongoing for years now making it all the way to the Supreme Court. At this point, the Supreme Court has vacated and remanded the specifics back to the 9th U.S. Court of Appeals. We expect the 9th U.S. Circuit to better define what the duty to monitor really entails for the Tibble case and for other cases similar.”

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. His new book Hey! What’s My Number? –  How to Increase the Odds You Will Retire in Comfort is available from your favorite bookstore.

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About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

11 Comments

  1. Terrance Power
    Terrance Power May 28, 09:20

    Good points as always, Chris. I may have to steal that “Tibble of the Iceberg” line….

    The United States may be the only country that allows employers to oversee their own company retirement plan. In Europe, for instance, this is illegal. The main reasons it’s prohibited almost everywhere else in the world is because of concerns of theft of retirement plan assets and lack of expertise.

    Employers in the U.S. will be forced to move to a retirement plan solution that can pretty much absolve them of liability due to the Tibble decision. I agree that 3(38) Investment Manager solutions will become more prevalent in the future, either on a stand-alone basis or in conjunction with a 413(c) Multiple Employer Plan solution.

    Employers should be allowed to concentrate on running their businesses instead of losing sleep about their company retirement plan. And plan participants deserve professional oversight to help insure a secure retirement in their future.

    Terry Power

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author May 28, 12:22

    Yep, I think once Congress opens the doors, you’ll see a mad rush to the MEP.

  3. Jim
    Jim June 01, 17:39

    Good story with many excellent observations. However, #5 couldn’t be further off base. Lower fees leading to poor performance? Someone has chosen to buy into marketing hype and ignore the actual evidence showing the exact opposite outcome. Reduced fees will improve performance. Forget the active-passive debate, lower cost active funds beat higher cost ones too. Can’t share an article with such a blatant misstep.

  4. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author June 01, 17:50

    Jim, thanks for your comment. I think you’re talking about something different than what is being described in the article. The article reflects forward-looking concerns. In other words, they haven’t happened yet. The concern about lesser value resulting from the “race-to-the-bottom” is a common concern. It’s shared not only by practitioners, but also by the DOL.

  5. R Schrader
    R Schrader June 03, 08:49

    Excellent article, Mr. Carosa; I’m fowarding the link to a colleague who might not be aware of the points you made.

    PS – You need a better proofreader.

  6. kim
    kim June 03, 11:11

    Tibble

  7. Joel L. Frank
    Joel L. Frank June 03, 12:14

    Hi Chris,

    What is the impact of the Court’s ruling on non-ERISA plans; i.e.; 403(b), 457(b) plans of state and local governments?

  8. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author June 03, 16:15

    Is that an offer to volunteer? 🙂 But seriously, sometimes the larger articles barely get done before the deadline, so there might be a typo or two. Anytime anyone sees something like that, let us know and we’ll fix it. Thanks!

  9. Scott W. Rivard
    Scott W. Rivard June 03, 18:05

    Chris,

    Thank you for providing these “10 Unexpected Changes.” In regards to plan sponsors retaining a firm or individual to act as a 3(38) item 8, it would seem that some in the industry are presenting this as “the solution” in meeting a plan sponsor’s fiduciary responsibilities and in essence avoiding participant lawsuits.

    While a 3(38) can provide some protection, we all know that in the event of a participant lawsuit the plan sponsor, as well as virtually all individuals / firms involved in the plan will be named. That’s the nature of the world we live in today.

    Unfortunately, your item 10 is dead on as to the ultimate outcome and most importantly to the detriment of all Americans.

  10. Dennis Myhre, AIC
    Dennis Myhre, AIC June 05, 12:07

    Chris,

    As usual, a fine article….. in reviewing the decision, the 6 year S/L is still there, but begins to run when the investment is removed from the Plan Sponsor’s menu of options. I know of at least one investment involving fiduciary issues that resulted in ERISA litigation filed in 2009 against the service provider, but failed to certify as a class. The case involved approximately 15,000 plans and over 200,000 participants. Within a year, the defendant insurance company settled the remaining 87 plaintiff’s claims after the investment option was removed from most plans in 2012.

    Based on the Supreme Court’s final judgment, the statute will continue to run until 2018 on the remaining claims rather than expiring in 2014. The DOL investigated but relied on the ERISA ligation to work out a settlement. Will the remaining plan participants that sustained losses have to re-file complaints with the DOL to generate more ERISA litigation against employers, or will the DOL automatically go after the plan sponsors if their investigation supports wrongdoing on the part of the service provider?

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