by Ericka J. Thomas (Winter 2016)
Earlier this year, the United States Supreme Court issued an opinion that addressed some of the nuances of fiduciary duty in Tibble v. Edison International, ___ U.S. ___, 135 S.Ct. 1823 (2015). Although the case addressed issues related to fiduciaries of an ERISA plan, there are numerous lessons that can be learned by non-ERISA fiduciaries.
In Tibble, a number of 401(k) plan participants brought suit against their employer and fiduciaries of the plan to recover damages for alleged losses suffered by the plan, as well as injunctive and other equitable relief based on alleged breaches of respondents’ fiduciary duties. The participants argued that the respondents violated their fiduciary duties with respect to three mutual funds added to the plan in 1999 and three mutual funds added to the plan in 2002. The participants argued that the respondents acted imprudently by offering six higher priced retail-class mutual funds as plan investments when materially identical lower priced institutional-class mutual funds were available. In considering whether the participants’ claims were timely filed, the Supreme Court conducted a thorough analysis of fiduciary duty.
In Tibble, the Supreme Court drew a distinction between an ERISA fiduciary’s duty of prudence in the initial selection of a plan investment, and that fiduciary’s continuing duty of prudence in retaining that investment thereafter. An ERISA fiduciary must discharge his or her responsibility “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use. Citing Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. , 134 S.Ct. 2459 (2014), the Supreme Court also noted that an ERISA fiduciary’s duty is “derived from the common law of trusts.” Under trust law, a fiduciary is required to conduct a regular review of its investments with the nature and timing of the review contingent on the circumstances.
Additionally, 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. The trustee must “systematically consider all the investments of the trust at regular intervals” to ensure that they are appropriate. In short, the court noted that under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. A plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.
The Supreme Court was careful not to address the scope of fiduciary duty or to issue specific guidelines on what a prudent fiduciary must do to satisfy his or her duties. This allows for fluid interpretation based upon the laws of particular states and the facts of each situation. This also requires non-ERISA fiduciaries to read between the lines for guidance on what actions they must take to satisfy their duties.
In Illinois, the Pension Code provides some guidance on the duties of local government fiduciaries. Like ERISA, the Illinois Pension Code requires a fiduciary to discharge his or her responsibilities “…with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in like capacity…would use.” (40 ILCS 5/1-109(b)) Section 1-109 also requires fiduciaries to defray the reasonable expenses of administering the fund and diversify the investments of a fund to minimize risk. (40 ILCS 5/1-109) The Pension Code further requires that each trustee shall use reasonable care to prevent any other trustee from committing a breach of duty. (40 ILCS 5/1-109.2)
With these statutory requirements and the guidance from Tibble in mind, public pension fund trustees must be diligent in executing their duties in a number of ways. First, pension boards must constantly monitor asset allocations, investment policies, investment performance, and investment fees after specific investment selections have been made. It is also important to periodically consider the performance and fees of your investment professional.
Second, although institutional investing can be daunting to a layperson, it is important that a fund’s investment professional provide periodic reports about the performance of individual investments and the portfolio as a whole. If the investment professional is not willing to provide these reports or to answer questions, it might be time to look for other services. Third, a pension board must document and record its review and consideration of investments in its meeting minutes. This documentation will serve as a powerful defense to any claims that the fund was not diligently reviewing and evaluating the investments.
Fourth, a pension board must make sure to annually review its investment policy to determine whether it should be updated and to assure that its investments substantially comply with its policy. Finally, it is important for fiduciaries to take their responsibilities seriously. It is not enough to have “a pure heart and empty head” when it comes to performing fiduciary duties. Continuing education for pension trustees is statutorily required in Illinois, and attendance at such classes should be closely documented and monitored. If a pension board conscientiously complies with all of these recommendations, it will arguably reduce its exposure to liability for breach of fiduciary duty.