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Long Island Businesses Turn out for Seminar on Game-Changing Tibble v. Edison Supreme Court 401(k) Decision — Gain Best Practices Advice from DOL and Top Advisors

 

Bethpage, NY…

A recent seminar on the May 15, 2015 Supreme Court decision in the Tibble v. Edison 401(k) case drew Long Island CEOs, CFOs, HR and other business executives who recognized the need to learn more about this “game-changing” ruling and its ramifications.

 

The event was co-sponsored by CJM Wealth Management (www.cjmwealth.com, Deer Park, NY) and the Long Island Forum for Technology (LIFT), and held at LIFT headquarters in Bethpage. It featured a panel of experts which included Charles Massimo, CEO of CJM Wealth Management, whose firm provides 401(k) advisory services and who has long advocated for  best practices in 401(k) plan processes and investments that are in the best interest of plan participants; Nichelle Langone, Esq., Supervisory Investigator with the U.S. Department of Labor’s Employee Benefits Security Administration (DOL’s EBSA); Donna M. Massanova, CPA, Partner, Employee Benefit Plans with the Certified Public Accounting firm of Baker Tilly Virchow Krause LLP; and Katherine A. Heptig, Esq., Counsel in the Corporate Department of the law firm of Farrell Fritz, P.C.

 

In Tibble v. Edison, the Supreme Court ruled that employers/plan sponsors have an ongoing duty to monitor the investments in their 401(k) plans and act prudently to eliminate investment options that are not in the best interests of the plan participants. Further, the Court’s decision expands the rights of employees/plan participants to sue their employers/plan sponsors for failing to be diligent in the monitoring of their 401(k) plans. As more than one industry observer has said, the Supreme Court’s decision in Tibble v. Edison should be a major wake-up call for all plan sponsors.

 

According to Massimo, “401(k)s are a huge profit center for Wall Street which has never had to justify its fees. While, the Department of Labor’s Fee Disclosure Rule of July 16, 2011 was an important first step in the right direction towards fee disclosure and transparency, the Court’s decision in Tibble v. Edison, now makes it very clear to plan sponsors that they have an ongoing duty of prudence to monitor these plans, or else face the risk of liability that can stretch beyond the six-year statute of limitations.”

 

Massanova, whose role as an auditor is to review the processes and internal controls in place for the monitoring these plans, as well as the selection of third party service providers and the fee structure, said, “The monitoring of the investment in Tibble v. Edison was blatantly lacking.”

 

Heptig added that, “In Tibble v. Edison, the ruling was that there is an ongoing duty to monitor. The attorneys for Edison argued that there has to be a major change to require the sponsor’s review and monitoring and, while the District Court and Appeals Court had previously agreed with this argument, the Supreme Court sided with the Tibble, the plaintiff.”

 

To illustrate the importance of plan sponsors’ ongoing monitoring became clear when Massimo demonstrated just how significant different decisions, from the investment share class to the associated expense ratios, can impact a retirement plan. His example showed how a difference between a 401(k) account earning 8% versus 6% over 40 years for a plan participant who invested $5,000 per year would represent a loss of $578,667 or $28,933 per year for the retiree. From the audience came a question as to whether all companies are eligible for all class of shares (institutional and retail), to which Massimo responded, “Yes, all plans can now be invested in institutional shares, instead of the high cost retail shares.”

 

A question was raised as to what prompts a DOL investigation of a 401(k) plan. Langone explained.

“In 90% of the cases, there is a complaint from an employee on which we at the DOL must act,” said Langone. “In other cases, our EFAST2 system pulls up red flags such as delinquent distributions, dishonest behavior or no bonding. We also have access to BrightScope (the leading independent provider of retirement plan ratings and analytics). “Langone continued, “When we review plans, we want make sure the compliance is there and that the people responsible are aware of their fiduciary responsibility and making decisions that are in the best interests of the plan participants.”
In discussing, “who is a fiduciary, Langone noted that, under the Employee Retirement Income Security Act of 1974 (ERISA), the named fiduciary is supposed to be noted in the plan documents, although sometimes they are not. She explained that ERISA defines fiduciaries as plan sponsors and decision makers. Since many company owners don’t know enough about 401(k) plans, they delegate the responsibility to a service provider, but the primary fiduciary still has a responsibility and ongoing duty to monitor their plan’s service providers and investments.

 

Massimo pointed out that a non-fiduciary involved in a plan is only required to make sure a plan’s investments are “suitable,” while a fiduciary has a responsibility to act in the best interest of the plan participants.  He added that investment houses like Merrill Lynch cannot be fiduciaries, but when you hire a third party, it’s contractual. Heptig noted that, “Even the act of delegating is subject to a fiduciary responsibility. The selection of a fiduciary must also be prudent.”

 

Massanova noted that, “If you are a fiduciary, your personal assets are at risk. You must document everything you do – from your processes to how you pick your service providers. Even regulators will ask about internal processes. If they feel you do have good processes, they will not expand their investigation. For smaller companies, it’s always prudent to have an independent audit, ideally on a three-year cycle.”

 

Massimo explained that the typical service provider is a “3(21)” investment advisor which means he/she can make recommendations to the plan administrator, but ultimately does not make the investment decision. The investment advisor shares the fiduciary liability with the plan administrator. By selecting a “3(38)” investment manager, the plan administrator and the employing firm is relieved from all fiduciary responsibility for the investment decisions made by the professional. He advised that, “Everyone should have a Fiduciary Manual containing everything you do and all of a plan’s documentation. Transparency is important. You want to know who’s doing what, what fees are being paid and to whom.”

 

Langone continued that “Under the 408(b)2 regulations, fiduciaries must disclose fees and the fees must be reasonable. They also have a responsibility to disclose plan fees to participants, as well as the investments and associated risks.”

 

Massimo explained how BrightScope provides third party scores (FI360 Fiduciary Score) for plans, benchmarking them against peer plans so sponsors can see how their plans compare. He said that fiduciaries should ask for their plans’ FI360 score.

 

Based on the interest in this subject and the increase in employee lawsuits against employers for failing to meet their fiduciary responsibilities as in Tibble v. Edison, CJM Wealth Management is planning a second seminar for October 21, 2015. For more information and advance registration, contact: CJM Wealth Management at: 631.777.1030.

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