Supreme Court Rules that Fiduciaries Have Continuing Duty to Monitor Fund Share Classes
The U.S. Supreme Court ruled that a 401(k) fiduciary has a continuing obligation to monitor plan investment selections and that the failure to select the lowest cost mutual fund share class available violated its fiduciary duty. Plaintiffs argued, and the Court agreed, that the plan sponsor breached its fiduciary duty by selecting higher cost retail class shares of certain mutual funds when identical lower-cost institutional class shares of the same funds were available. The Court then held that the plan sponsor potentially breached its fiduciary duty by failing to fulfill its continuing obligation to monitor plan investments. Consequently, plaintiffs’ claims were not time barred even though the plan sponsor selected the investments more than 6 years earlier, which, argued the defendants, would have time-barred the claim.
OUR TAKE: We believe the SEC would apply the same standard to investment advisers outside the ERISA context. An adviser that selects the higher-cost share class mutual funds when lower-cost shares of the same funds are, or become, available may breach its fiduciary duty. And, this monitoring duty continues throughout the adviser-client relationship. See also http://blog2.cipperman.com/2013/10/higher-cost-share-class-violated-best-execution/.