Tibble v. Edison: Lessons for 401(k)/403(b) Plan SponsorsJuly 21, 2015
Rick C. Parmelee, CPA
In 2007 a lawsuit was brought against the Edison International company sponsored 401(k) plan. The suit alleged that the plan sponsor and its fiduciaries failed to monitor the fees charged to the company retirement plan.
In the Tibble v. Edison case, there were a number of proper actions being taken by the plan fiduciaries. For example, the fiduciaries had regular meetings, kept minutes, maintained an Investment Policy Statement and utilized an investment advisor to advise the plan fiduciaries. However, the Supreme Court ultimately concluded that this was not enough.
There are five key outcomes from this case to which plan sponsors and fiduciaries should pay close attention. These lessons, outlined below, should be implemented by all sponsors of company retirement plans:
Monitoring – Plan fiduciaries have a continuous obligation to monitor funds and expenses charged to the plan. Plan fiduciaries cannot just focus on investment performance without understanding the fees charged by these investments.
Retail vs. Institutional Mutual Funds – The Edison International plan had over $1 billion in plan assets, yet the plan only offered retail class mutual funds, which tend to be more expensive than institutional class funds. Plan fiduciaries should routinely request institutional shares. If institutional shares are not available, plan fiduciaries should inquire about the lowest cost funds available and consider low-cost target date and index funds.
Document, document, document – While minutes were kept by the plan fiduciaries in the Edison International case, the minutes did not document the discussions between plan advisors about fees charged by the funds in the plan. Plan sponsors should also document their review of vendor services, plan investment decisions and other fiduciary matters.
Over reliance on advisors – Plan fiduciaries cannot simply rely upon professional advisors. Plan fiduciaries need to ask proper questions of the advisors. This includes having a full understanding of the scope of the advisor’s review of the funds offered in the plan.
Process – Plan fiduciaries must also have a prudent process for evaluating and monitoring the investments offered by their plan. It is critical that fiduciaries regularly review the investments offered, benchmark their performance, review fees charged not only by plan advisors but by the investments in the plan and inquire about the availability of lower cost funds.
While Edison, on the surface, appeared to be acting prudently by having an investment committee, investment advisors and maintaining minutes, this case shows this was not enough. This case should serve as a warning to plan sponsors and fiduciaries that increased vigilance is necessary in overseeing your company retirement plan. If plan fiduciaries are uncomfortable or unsure about what responsibilities they have, they should seek opportunities to be educated on these responsibilities. Ultimately, the responsibility for the plan lies with the plan sponsor and fiduciaries, not outside advisors. For more information, please contact Rick Parmelee at firstname.lastname@example.org 860.570.6492
Richard C. Parmelee, CPA, is a partner with BlumShapiro. BlumShapiro is the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with over 400 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.