Last year, a much-watched legal case on the U.S. Supreme Court docket pitted employees versus employer while questioning the timeline for 401(k) fiduciary responsibility. The resulting unanimous decision on behalf of the plaintiffs in Tibble v. Edison International was seen by many as a strong shot across the 401(k) advisory bow.
The ruling found that a “fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones,” even outside of the six-year statue of repose mandated by the Employee Retirement Income Security Act (ERISA).
Advisors and plan sponsors are now living warily in a “Tibble v. Edison 2.0” world that has seen even more excessive lawsuits in play, as well as massive settlements in previous cases. The case also put a spotlight on plan monitoring and what that should entail.
Jerry Schlichter, founding partner of St. Louis-based Schlichter Bogard & Denton, was the plaintiff’s attorney in Tibble and offered his firsthand perspective on the case, what it means to plan sponsors and advisors and why adjusting to today’s new normal isn’t as hard as one may think.
Schlichter’s maverick and hard-charging pursuit to bring justice to 401(k) plan participants belied his thoughtful and affable demeanor, evident in his responses to our questions.
In his recollection of the heady moments after the 9-0 Supreme Court ruling in his clients’ favor, Schlichter was reflective, yet modest: “We were very pleased, and it was gratifying for American workers and retirees in all plans.”
“Few decisions are unanimous and we always felt that this was a clear cut-decision when they ruled this way,” he added. “The Supreme Court dug down to really understand fiduciary duty and processed the importance of protecting participants.”
When the defense argued that it would be too confusing to explain fees to employees in the future, he said the court pushed back hard in its oral statements, emphasizing the inaccuracy of such a prediction.
Schlichter laughed as he said it wouldn’t be confusing at all, quoting a portion of Justice Elena Kagan’s oral argument: “The day when you get from your mutual funds a notice that says, by the way, you’re a preferred investor, we’re switching you, it’s the exact same fund under a different name, now you don’t pay fees – that’s a red-letter day for an investor.”
Asked whether the plan sponsors’ approach to investments and fees that he highlighted in his lawsuits has been the exception or the norm, Schlichter was frank.
“When we started bringing cases 10 years ago, it was very common for large plans to use retail mutual funds,” he said. “There were no Department of Labor actions brought at that point and basically no checks whatsoever. It had not been thought about clearly by large plan sponsors. But as a result of recent rulings, they better understand that plans should not be paying retail fees, or they need to justify the fees.”
Schlichter offered a straightforward response to other critics, including those who complain that ERISA litigation has raised the regulatory burden for operating a 401(k) plan. Regulations may seem burdensome to plan sponsors, but they are in place to protect employees. “We have seen what happens in the absence of litigation,” Schlichter said. “Employees paid billions of dollars in excessive fees.”
He added, “When we file these cases, the defense argues that the sky will fall and employers will cease to offer 401(k) plans because it’s becoming too burdensome. Guess what: The sky hasn’t fallen, and there are more assets today in 401(k) plans and more 401(k) plans overall. The sky remains shining brightly.”
The Department of Labor has been supportive of Schlichter’s efforts and he feels that the agency’s implementation of 408(b)(2) regulations grew from a heightened awareness of the issues that he and others raised regarding excessive fees. He also looks forward to their careful monitoring of the compliance with the newly announced Fiduciary Rule.
“The DOL role is enforcement, and they monitor the compliance and bring action when it is needed,” he said. Does he think that his lawsuits have influenced the DOL? “Yes, I believe they have heightened awareness that fiduciary breaches will not be tolerated and that the DOL has a powerful enforcement role that transcends a particular case.”
Schlichter remains optimistic on the future of 401(k) plans and especially on the role of advisors.
“Things are moving in the right direction. Fees are coming down in 401(k) plans, which is good for workers and retirees. If sponsor compliance makes excessive fees lawsuits go away, that would be a good thing.”
In the wake of the Tibble decision and those like it, Schlichter offers advice to advisors on how to stay on the right side of fiduciary: “Follow the simple bright line. The plan sponsor and advisor must operate for the exclusive best interests of the participants and that should always be the guiding principle. If there is a gray area, follow that principle. It’s that simple.”
The need for advisors and plan sponsors to work together is more important than ever – especially when it comes to monitoring, reviewing plan options and making changes. Technology advancements have made it even easier to stay abreast of regulatory changes, investment options and the needs of employer and employee, all of which should operate in the name of reducing fiduciary risk.
“There must be ongoing and diligent communications between the plan sponsors and advisors,” Schlichter said. “Advisors have a very important role, and the court process has actually enhanced it. The need for them to provide good advice and support to sponsors has never been greater.”
 Ronald Mann, Argument analysis: Employer all but concedes in dispute about ERISA monitoring, SCOTUSblog (Feb. 26, 2015, 10:05 AM), http://www.scotusblog.com/2015/02/argument-analysis-employer-all-but-concedes-in-dispute-about-erisa-monitoring/
 Source: U.S. Department of Labor, Tibble Amicus Brief, in support of plaintiffs-appellants
 Source: U.S. Department of Labor, Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice