On Monday the Supreme Court extended the statute of limitations for class action law suits against employers for improper management of employee retirement funds. The decision was unanimous and came from the case Tibble v. Edison, a class action suit concerning investment choices and high mutual fund fees.
The issue presented in Tibble centered around whether an employer violated the Employee Retirement Income Security Act (ERISA) in offering retail-class mutual funds when identical, cheaper mutual funds were available. More specifically, the court ruled that the six-year statute of limitations was unjust.
This decision redistributes risk of retirement plans back onto the employer in a similar fashion to Fifth Third Bancorp v. Dudenhoeffer (2013). Two years ago, the court ruled that the fiduciary is in fact not entitled to a “presumption of prudence,” forcing companies into increasingly sketchy legal ground when selecting stocks to suggest to participants.
If employers buy company stock for individual retirement plans they will be left vulnerable to insider trading accusations. That said, if an employer buys company stock and it goes down, they would be vulnerable to lawsuits for violating the duty of prudence (as the “presumption of prudence” is no longer a legal safety net). And finally, if companies do nothing, other investors may take idleness as insecurity and sell their stock, forcing the price down. Defined contribution plans, despite increasing legal exposure for corporations, are tremendously beneficial for employers.
The past 25 years has marked a dramatic shift for retirement plan policies. With the growing prevalence of defined contribution plans (e.g. 401ks) there has been a shift of risk from employer to employee. On the other hand, defined benefit programs (e.g. pensions) guarantee a certain amount of money to the employee, and if investments in the program underperform, employers are responsible for covering the difference.
The shift to defined contribution plans has been sudden and stark. In 1989, full-time private sector workers were evenly divided between defined benefit and defined contribution plans whereas in 2010, 50 percent of private sector workers had defined contribution plans where only 22% had defined benefits.
Sometimes, as was the case with Tibble, employers offer stock to employees that is preferred rather than ordinary, increasing the fees associated with the retirement plan for disproportionately marginal gains. Additionally, certain stocks selected can be unnecessarily risky, and companies are prone to impose additional, hidden charges.
While the Supreme Court has consistently upheld the fiduciary responsibility of employers to conduct due diligence concerning investments, it has refused to define what that means. In other words, companies are required to extensively monitor their employee’s accounts, but many question how far companies must go to preclude themselves from legal liability. Therefore, companies cannot ignore retirement accounts, but they don’t have to monitor them excessively.
In Tibble, the 9th Circuit Court was overruled on its interpretation of the statute of limitations. The specifics of the case however were not decided upon, and remanded to a lower court to determine whether the fiduciaries shirked their responsibility of due diligence.
The Supreme Court has taken the right stand on this matter. Employers rarely offer defined benefit plans anymore; opting for defined contribution plans instead. This is clearly in their interest as employees now bear much of the risk associated with such.
To protect workers, the Supreme Court has continuously increased the legal risk of offering such plans. These 401k plans, which were never intended to serve as retirement plans in the first place, are a main contributor to the increasing retirement inequality in America, and must be amended to protect consumers from unnecessary and undue risk.
In conclusion, the Supreme Court protected your retirement fund by increasing corporate liability for the mismanagement of defined contribution plans.
Photo via Supreme Court of the United States