PenChecks Blog

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

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.

It’s 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 E. Preovolos, President, PenChecks Trust

One Response to “What the 401(k) Supreme Court Decision Means to Plan Trustees”

October 19, 2015 at 8:10 pm, Muhammad said:

If someone makes a real efroft and tries, I am the first person to praise them for their efrofts even if they are not completely successful. Although, this may seem like a harsh assessment, I don’t think the Trustees have put much of any efroft into actually managing the association and it’s business affairs (and the facts prove this point). The Trustees have taken absolutely no responsibility for their inactions and like to use the inept excuse that they are unpaid volunteers like that is a free pass to put in substandard and incompetent efrofts. They sought the position as a Trustee knowing it was an unpaid position and the responsibilities to each and every unit owner. As the first elected (not appointed) President of Liberty Commons, I have a unique perspective in my assessment, having put in the countless hours of efroft to effectively manage the business affairs of the association. During my administration, we put the most contributions toward Capital Reserves (i.e., major future repairs and maintenance) in Liberty Commons’ history (36%). When I look at the amount of money that I have paid in Common Area Fees over the last 10-years and what my percentages (0.8239%) of Capital Reserves are actually there ($1,240) for future expenses, the number is absolutely appalling and indicates complete fiduciary negligence by the Board of Trustees (from 2005 on). However, the Trustees who live in their own reality distortion field want to spin it as a failure of Hodan Property Management and Development, when in fact the Trustees bear the ultimate responsibility not the managing agent. If your stockbroker had performed this poorly, would they still be managing your investment portfolio? I think the answer would be a resounding No. Well, the fact is your condominium is part of your investment portfolio and for most it is the largest investment. Every single Trustee should resign immediately and allow competent individuals to step up to resolve the issues created by them (and previous Trustees) and individuals will step up. Unit owners should be outraged and demanding each and every Trustees resignations and conduct an actual election as outlined in the governing documents. Allowing incompetent Trustees to continue to appoint other unqualified individuals to the Board is a continued recipe for financial disaster for the association and individual unit owners who will bear the bailout expenses.


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