The Teeth of Tibble

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The Supreme Court decision on the Tibble v. Edison decision is barely dry and the usual pundits are throwing in their two cents about how this decision supports their beliefs. So I guess it is time for me to join the ranks and share my thoughts. While I agree with many points that have been made, I think that the retirement services industry has missed the true scope of this decision.

Nevin Adams recently opined (read it here) that the only claim that was considered was the statute of limitations. And he is right. The only thing that the Supreme Court said was exactly what we have seen from automatic enrollment for years now: namely, if you don’t reject what is in front of you, you accept it. In the case of automatic enrollment, if a participant does not elect out of a deferral amount or a QDIA, he or she has legally accepted it. The Supreme Court basically just painted fiduciaries with the same brush. If you do not question and reject the revenue sharing or share class or investment offered by the plan, you have accepted it. And that acceptance resets the statute of limitations.

Superficially, that is a pretty simple decision. If it stopped there. But as we know, that is not how our friends in the legal profession work. This is where the teeth of this case actually begin to grow.

This decision raises the fiduciary bar. As we have seen time and again, there may be an accepted practice until a court case challenges conventional thinking or until some other method of procedural prudence comes along. For example, take the multiple fund manager strategy. At one point in time, the only way was to offer investments from only one fund family. That strategy is now noticeably absent from a majority of the retirement plan market. Retirement plan benchmarking is another example. Most plans have historically chosen to take their plans to market as a method of benchmarking. A whole cottage industry popped up several years ago to tell you how your fees compare to other plans of similar size around the country. And now QP Steno has raised that bar again.

The legal profession makes a living at taking seemingly basic decisions, like Tibble, and extrapolating case law to support future claims. If you have insomnia or a thing for research, pick any case out there – any case on any topic – and read through the cited case law. An overwhelming majority of the referenced cases will not be exactly what the current case is about. But it will have a pearl of legal wisdom that can be produced in court to support that particular attorney’s point. The case law begins to take on a life of its own. It is a living body that continually adapts to the current setting. And that is where the teeth continue to grow.

In the case of Tibble, we are presented with a case where the only claim considered was the statute of limitations. However, in the UNANIMOUS decision, the Court decided that every time the committee accepted the current fee structure, it reset the statute of limitations. In this case, that is only limited to the revenue sharing agreement for the investment options of the plan. However, this concept of “failure to reject is the same as acceptance” will be the teeth of this decision because it will be exploited in future fiduciary cases. Think for a moment about every time you witnessed a retirement plan fiduciary reject a recommendation. It doesn’t matter what recommendation. If it happened in the last seven years, it could reset the statute of limitations according to this case law. If the plan sponsor rejected benchmarking, for example, it could be interpreted that he has decided that the current fee structure, service provider arrangements, or even the retirement readiness of the participants are acceptable. It doesn’t matter that the plan sponsor doesn’t feel that he had the resources to go through such an exercise because he is in the middle of a new product launch or a companywide reorganization or any other reason. The reason in not important. What is important is that he has, in essence, reaffirmed all arrangements by failing to reject them. And the lawyers can brandish the Tibble decision to support a fiduciary breach claim based on failure to reject.

This could be a dangerous precedent for retirement plan service providers, especially in conjunction with the progress toward a new fiduciary standard for the retirement plan services business. Combining the Prudent Man rule with the duty of loyalty to the participants and then adding this concept of failure to reject, you end up with what could be a perfect storm. If I, as an advisor, do not review my fee structure on the plan to determine if I can pass along savings to the plan (and ultimately the participants), have I committed a fiduciary breach? After all, I have a duty to the participants as a fiduciary. Is the statute of limitations reset for every year that I do not review that arrangement? If I am not looking for a more efficient delivery method for education to the plan, am I setting myself up for problems?

All of the sudden, what has been glossed over as advice to “review your funds for cheaper share classes” has become a fiduciary nightmare for those who are not proficient in the retirement plan services business. Fiduciaries must begin to outline their process, delegation of responsibility, plan review procedures, and documentation better if they want to be prepared ahead of the next wave of litigation. The teeth in case law will continue to get longer and sharper. And the judgements will continue to pile up. Don’t get bitten.