Skip to main content

You are here

Advertisement

Case of the Week: Fiduciary Responsibility and Share Classes

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in New Jersey is representative of a common inquiry related to investment share classes in a 401(k) plan. The advisor asked:

Is there any guidance that plan fiduciaries should follow regarding how to determine what share classes of funds should be used in a plan’s investment line up (e.g., retail vs. institutional shares)?

Highlights of Discussion

• The most specific guidance we have on this topic comes from the court case Tibble v. Edison International, No. 10-56406 (9th Cir. 2013). While the case addressed several issues, one of the key findings was that, in keeping with the ERISA requirement to evaluate the reasonableness of expense ratios for plan investments, fiduciaries have an obligation to compare and select appropriate fund share classes for their plans.
• Moreover, the Tibble v. Edison case demonstrated that fiduciaries must become knowledgeable about the available share classes and associated investment minimums, if any, even going so far as to specifically ask for waivers of investment minimums in order to be able to invest in institutional share classes.   
• The bottom line is that plan sponsors and the financial advisors who assist them have an obligation to understand what share classes are available, and must consider the plan’s purchasing power, among other variables, when selecting the ideal share classes for the plan and its participants under the general fiduciary responsibility of ensuring plan fees are reasonable.
Apex Logo
Conclusion

One of the many fiduciary obligations plan sponsors have is to ensure they are not spending more than reasonable sums for plan operations, including for their plans’ investment lineups. Some plan sponsors may be surprised to learn their process for evaluating investments should include a step that considers share classification as well. Financial advisors who are aware of this important criterion are better positioned to assist their plan sponsor clients.

The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.

Advertisement