Tibble v. Edison Reviewed by U.S.SupCt - But Are the Right Facts Being Considered?

During its 2014-15 term, the U.S. Supreme Court will hear arguments on the following issue in the case of Tibble v. Edison: "Whether a claim that ERISA 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.”

I find the U.S. Department of Justice's arguments in Tibble v. Edison persuasive:  http://www.justice.gov/osg/briefs/2014/2pet/6invit/2013-0550.pet.ami.inv.pdf.

Yet, what bothers me at first glance, from a reading of the U.S. Department of Justice's brief (in support of Supreme Court review of this issue), is the lack of understanding as to why ERISA plan sponsors must review plan investment choices periodically, and hence the lack of arguments made over this point. The reasons are numerous:

1. Mutual funds can change their investment strategies over time;
2. Fund managers can change;
3. Investment companies and their investment advisers may deserve heightened scrutiny due to legal concerns and/or compliance violations; and
4. Over time fees and costs within a fund can change - by action of the investment adviser, by an increase or decrease in portfolio turnover rate, by larger market impact costs (either due to the fund's increased size, or for index funds because other funds may now be tracking the same index). 

Even if the risk attributes and investment strategies and fees and costs of the fund stay the same, mutual fund management does not exist in a vacuum.

For example, economies of scale may exist with the mutual fund industry and/or better, lower-cost service providers may be secured, which cause mutual funds' annual expense ratios to decline over time. Competitive forces may drive down management or other fees throughout the mutual fund industry. If no due diligence is undertaken by the plan sponsor, the plan participants will end up overpaying, to their detriment.

Additionally, new investment strategies emerge. The investment strategy followed by a fund may be disproven by new research, or simply unable to maintain an advantage due to a rush of investors (or other fund managers) to also use the strategy. New investment strategies will appear which take advantage of new insights from academic research.

The arguments by Edison in this case revolve around the langauge of the statute - i.e., that the 6-year statute of limitations runs from the date of an "action" undertaken by the plan sponsor. But such is a very narrow view of "action." Due diligence is required on an ongoing basis. (At least annually, in my view - although in this case the plan's board of trustees met quarterly.) If there exists a duty of due care, which includes prudence and due care, then that duty is met by an action taking place; othersie the duty of due care is not fulfilled. Fulfilling the duty of due care requires that a decision take place, by the plan sponsor. Even a decision to not change the fund line-up is an "act" - in this regard.

I hope that the facts brought forth at the trial in the Tibble v. Edison case permit these arguments to be made, as to why a continuing duty to monitor investment choices by an ERISA plan fiduciary exists. And I hope that the U.S. Department of Justice, or the appellants, or others permitted to file amicus briefs, will be able to argue these points.

Ron A. Rhoades, JD, CFP(r) serves as Program Director of the Financial Planning Program at Alfred State College, Alfred, New York. He also serves as 2013-4 Chair of the Steering Group of The Committee for the Fiduciary Standard. He may be reached at RhoadeRA@AlfredState.edu.