9 1/2 Questions: A conversation with Sean Patton By: Sean PattonAIF®

The recent court case, Tibble v. Edison International, has the industry talking about how plan sponsors need to reevaluate how their plans are run and why having a process in place is essential.

To help shed some more light on the subject, Confero was able to interview Sean Patton, one of the founding partners of Westminster Consulting. Sean discusses why Tibble v. Edison is an important case plan sponsors should make themselves aware of. 

Sean, we’re going to talk about the Tibble v. Edison case – some would say an important case that all plan sponsors should spend time with. Do you agree? 

Absolutely, there’s a lot to be learned from not only a fiduciary perspective, but also a practical perspective that can allow plan sponsors to improve the experience of the plan for their employees. 

Is it your experience that most plan sponsors are aware of the case and its significance? 

Most plan sponsors are not aware of Tibble v. Edison and what the importance is for them and their employees. I think most plan sponsors are buried with the day-to-day responsibilities of running a business and therefore anything associated with their Defined Contribution plan typically does not rise to the top of their priority list. 

How do you discuss Tibble w/ clients and not appear to either be judgmental of their current structure and decision making process or scold them about their behavior? 

Westminster’s role as a consultant is to be educational and informational with our clients to assist them in understanding what their different responsibilities are, and in this case the court cases that may apply to them. Then hopefully through that education, allow them to be better fiduciaries and stewards for their employees’ dollars. 

Practically speaking, clients have a lot on their plates and I would add that they are generally and genuinely well-intentioned with regards to the plan and participants. Doesn’t this count quite a bit? 

It may count, but the courts have been very clear that a good heart and an empty head defense does not ring true. So while what we said is true, they are very busy, at the end of the day they have a responsibility and a liability to make sure they are carrying out their duties under ERISA. 

What are your top 3 tips for clients who want to improve their behavior in light of the Tibble decision? 

I think the number one thing that plan sponsors should be doing right now— not only in light of Tibble, but in light of 408b(2)— is going through some type of formal process to evaluate the reasonableness of the fees for any of their covered service providers, which obviously includes their recordkeeper. From that, I think when they understand how revenue sharing works, they are then able to take a look at the share classes they have – which was one of the biggest takeaway from Tibble—and make sure that they have the appropriate share classes for their plan. 

Most fiduciaries do not understand how revenue sharing works and the different share class structure. This is an area where an outside expert can bring value to an employer. We typically review clients’ exisiting share classes, what revenue sharing is being generated, and how much revenue sharing the plan needs.

We can then make suggestions to the plan sponsor on how to optionally construct a fund lineup that places the appropriate share class in the plan. This can ultimately reduce the all in fees for the plan. 

What’s your prescription for ongoing vigilance to keep your clients away from finding themselves to the right of the “v.” in any action? 

Certainly ERISA is a process-driven law and so, on behalf of our clients, we want to make sure that we have prudent process in place that protects them in a number of different areas ... So process and the documentation of that process are critical.

Have you had a situation where you were advising a committee about an issue or taking a certain course of actions and they completely ignored your advice? W/O mentioning names can you walk the reader through it? 

I would say for our retainer clients, the answer would be no. I mean there is reason why they’ve hired us—they get their responsibilities, they understand the liability and the breadth of what’s expected of them. But for some of our project clients, we have seen where we’ve made a recommendation and they either have kind of pushed that recommendation aside or have not been timely in responding to that recommendation. 

So an example would be a recent benchmarking that we did for a client. There was an identified area of liability that came up in our review. It had to do with compensation received by an advisor out of the plan and the advice he was providing to employees. Our first area of concern was that his compensation seemed unreasonable. It was above what others were receiving for similar services. Secondly, his agreement with the client disclosed that he was not a fiduciary, yet he was providing specific advice to employees. This very well could lead to liability for the fiduciaries of the plan. We were very clear to the client that they needed to address this issue sooner rather than later. At this time, they have yet to examine this further. 

How did it turn out? Are they still clients? 

We are hoping to assist them in an ongoing relationship; I think it’s a committee that’s fractured in their appreciation for the risk that they have, as fiduciaries, to their defined contribution plan. I think a certain segment of that committee recognizes the need to get ongoing assistance and then other parts of that committee feel they don’t need the assistance—that the plan just kind of runs itself. So, stay tuned. 

Are you conscious of “absent” behavior when talking with prospects or new clients and your exposure? 

I think it’s very difficult again to do what we’ll phrase as “turning the light switch on” for committees if they don’t want to hear it. Again, for most of them, this is not their full time job. They have a lot on their plate and it’s almost like this is a nuisance for them to have to carry out this responsibility. 

So the goal of the Westminster consultant is to be a consultant to “turn the light on for them,” kind of lead them to what best practices are, and hope they recognize the benefit of behaving as the appropriate fiduciary should. 

So what’s better: an empty head or a good heart? 

I think a good heart is certainly better, but at the end of the day the courts have been very clear—a good heart and an empty head is still not a reasonable defense. Committees need to be more engaged with regards to their defined contribution plans. They need to make sure they have a prudent process in place and where applicable, use outside experts to assist them in meeting those responsibilities and in mitigating their liability.

 
Sean D. Patton

Sean is a Founding Partner of Westminster Consulting, where he currently works with corporate, non-profit and foundation clients.

Sean is involved in the local community through his memberships in Rochester Rotary. He is also the Past-President of the Board of Directors for Camp Haccamo, a Rotary...

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