The Supreme Court on Fiduciary Responsibility for a 401(k) Plan

Posted On: December 12 2015

ERISA §3(38) authorizes the sponsor of a 401(k) plan to hire an investment manager with complete discretion over selecting, monitoring and replacing the Designated Investment Alternatives in that plan. The agreement must be in writing and must state explicitly that the investment manager is serving in that capacity in accordance with ERISA §3(38).
The sponsor is still the plan fiduciary and as such is responsible for the selection and oversight of the investment manager. The investment manager, however, assumes the fiduciary responsibility for the plan’s investments.

Many sponsors fail to appreciate the breadth and depth of their responsibility for the plan’s investments when they choose to go it alone. Investing is not a part time endeavor, especially for an dedicated employer committed to growing their own business. Assuming responsibility for a complex set of decisions outside of one’s professional expertise is at best a risky endeavor. At worst it is a liability that lands them in court.

Here’s what Supreme Court said about a sponsor’s fiduciary responsibilities for the investments in their 401(k) plan:

“Expenses such as management or administrative fees can sometimes significantly reduce the value of an account in a defined contribution plan.”

“(The District Court) wrote that respondents had ‘not offered any credible explanation’ for offering retail-class, i.e., higher priced mutual funds that ‘cost the Plan participants wholly unnecessary (administrative) fees,’ and it concluded that, with respect to those mutual funds, respondents had failed to exercise ‘the care, skill, prudence and diligence under the circumstances’ that ERISA demands of fiduciaries.”

“Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones.”

“This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

“Rather, the trustee must ‘systematically consider all the investments of the trust at regular intervals’ to ensure they are appropriate.”

“Managing embraces monitoring…”

“A trustee’s duties apply not only in making investments but also in monitoring and reviewing investments, which is to be done in a manner that is reasonable and appropriate to the particular investments, courses of action, and strategies involved.”

Hiring a ERISA § 3(38) investment manager to assume the fiduciary responsibility related to your plan’s investments nothing less than smart risk management by the plan sponsor. It is as essential to a well-run business as their accident liability insurance, nothing more and nothing less.

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