The pivotal observation in the recent Supreme Court judgment on Tibble vs. Edison is that “a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.” It’s hard to argue with that sentiment. But there is a tension between the need for principles that ultimately protect plan participants, and the need for specific rules that tell fiduciaries what is required of them. It is unreasonable to ask fiduciaries to operate without specific guidance.
Fiduciaries should monitor their investments
For general comment on the Tibble decision, here is a link to an overview by Mike Barry of Plan Advisory Services. In this post, I will focus on what it tells us about the struggle that exists within the current regulatory environment to find the right balance between principles and rules.
The context for this struggle is what I recently heard described as “a robust plaintiff’s bar” (an expression loosely translatable as: a lot of class action lawyers), which has left fiduciaries on the defensive. It’s not that many years ago that Defined Contribution plans were seen as the soft fiduciary option relative to Defined Benefit: that’s no longer the case. If fiduciaries feel that no matter what they do, there is a danger that somebody may feel it is worth taking them to court, then a principle—even a principle as reasonable as “you should monitor your investment program”—is not much help. In that situation, fiduciaries want a way to be confident that they can demonstrate they have done what is required of them.
The tension between principles and rules
This environment gives rise to two separate types of threat to the effectiveness of the retirement system, and that in turn creates a tension between principles and rules.
On the one hand, we need clear principles as a basis for law and to ensure that plan participant interests are put first. If fiduciaries focus on following prescriptive rules, then their decisions will only be as good as the rules themselves, yet those rules will be reactive in nature, constantly trailing changing circumstances, and potentially acting as a barrier to the evolution of best practices. As a UK regulator put it “a large volume of detailed, prescriptive and highly complex rules can divert attention towards adhering to the letter, rather than the purpose of our regulatory standards.”¹
Narrow considerations of self-protection are not a sound basis to serve the best interests of plan participants, as Josh Cohen has noted in the context of the use of active or passive investment management.
Hence ERISA establishes the fiduciary principles of a duty of care and a duty of loyalty. Good regulation must start with principles. But it cannot end there. Without clear guidelines, fiduciaries will feel too vulnerable to the above-mentioned “robust plaintiff’s bar.” It becomes unreasonable, and potentially even unworkable, to ask fiduciaries to operate without specific guidance.
So the Supreme Court’s decision—that a fiduciary’s duties cover not only the selection of investments, but also their regular review—is likely to have added to fiduciaries’ uneasiness. Not because of the requirement to monitor: if I’d asked a random fiduciary last week whether they thought they had an obligation to keep an eye on their investments, I don’t think many would have said “no”, or even “only until the Statute of Limitations kicks in”. Rather, it’s that here is one more aspect of the fiduciary’s role which is now in a state of flux: it will take some time to lock down exactly what the required review process is expected to involve. That’s a subject for another day.
In the meanwhile, probably the best thing that fiduciaries can do is to make sure there’s a solid governance process in place, which places the best interest of plan participants at the heart of the program. That process will include, for example, steps to monitor investments, and to ensure that fees are reasonable, to document the decisions that are taken, and to partner with experts when help is needed. In today’s environment, these steps are more important than ever.