What the 401(k) Supreme Court Decision Means to Plan Trustees


By Peter E. Preovolos, President, PenChecks Trust

The U.S. Supreme Court recently rendered a decision that could greatly impact retirement plan trustees. For TPAs, this decision provides an opportunity to add additional value to your plan trustee clients. But first let’s look at the decision.

On May 18, the Supreme Court held that fiduciaries who select investment options for 401(k) plans have a continuing duty under ERISA to monitor their selections and remove imprudent options.

In supporting its decision, the Court noted that under the law of trusts, a trustee has a continuing duty to monitor trust investments and remove imprudent ones, and that this duty exists “separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

As a result, a claim alleging that a fiduciary failed to prudently monitor and remove the investments can still be deemed timely as along as the alleged failure to monitor occurs within the ERISA-defined limitations period.

Its Not All Bad

What does this mean to plan trustees?

The bad news is the Supreme Court ruled that trustees can be held responsible for imprudent plan investments that were made by someone else or that were made before they became a trustee. In other words, trustees have an ongoing responsibility to monitor plan investments regardless of when and where they were made.

For example, suppose an investment was made 20 years ago, long before the current trustees came aboard. Even if a suit was not brought within six years of the initial investment (or whenever the fiduciary breach was discovered), the current trustees can be held responsible for not having monitored the investment and removed it from the plan once it was deemed imprudent.

The good news is that the Supreme Court ruled in favor of the traditional 6-year “look-back”period for filing claims of fiduciary imprudence. They opined that although trustees are continually responsible for monitoring plan investments, they can only be held liable for damages going back six years. However, the Supreme Court sent this portion of the case back to the lower court for further review. So the ultimate outcome of their decision remains to be seen.

Create Value By Educating Clients

In the meantime, as a TPA you have a great opportunity to reinforce your value to trustee clients by educating them about their fiduciary duties. Most trustees are not retirement plan professionals, and have little understanding of their fiduciary responsibilities. You can improve their understanding by teaching your clients about their fiduciary obligations, especially as they relate to this Supreme Court decision.

Start by making them aware of the Supreme Court ruling and how it impacts their duties as trustees for the plan. Explain what terms like “prudent”mean and how they can be held liable for handling plan investments in an imprudent manner. Most of all, make them aware of the importance of timely action should they determine an investment has become imprudent or if they note other trustee actions that could prove harmful to the plan.

Pay attention to what happens with this case when it goes back to the lower court so that you can update your clients in a timely manner. And if you really want to add value, periodically remind your plan sponsor client to work with the Plan’s investment advisor to review the fees, performance and suitability of the Plan’s investments. Most TPAs don’t offer this service, even though doing so can serve as a powerful differentiator at contract renewal time.

With more TPAs expressing an interest in becoming 3/16 Plan Administrators, it seems that the industry as a whole is raising its level of awareness regarding fiduciary responsibilities –a trend that is long overdue.

The more we educate our clients about these issues and help mitigate their fiduciary risks, the more they will recognize and appreciate the tremendous value we bring to the table.

Peter_Preovolos_headshotAbout the author: Peter E. Preovolos is President of PenChecks Trust, a 20-year provider of a complete suite of retirement distribution services to help institutions, administrators, advisors and plan sponsors save time and money while serving their clients more effectively. He can be reached at peter@penchecks.com.



Gavel photo by Joe Gratz via Flickr CC License

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