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ERISA Fiduciaries have Ongoing Duty to Monitor Trust Investments, U.S. Supreme Court Rules

By Charles F. Seemann III and René E. Thorne
  • May 19, 2015

Plan fiduciaries have a continuing duty to monitor investments offered under a 401(k) plan, the U.S. Supreme Court has ruled in a unanimous decision. Tibble v. Edison International, No. 13-550 (May 18, 2015). 

Tibble has been much-anticipated by Employee Retirement Income Security Act (ERISA) practitioners and plan administrators ever since the Supreme Court granted certiorari to consider whether ERISA’s six-year limitations period barred imprudent investment claims where the initial investment decision was made more than six years prior to suit. At only 10 pages, the decision side-steps a comprehensive discussion of numerous subsidiary questions, including whether ERISA recognizes a “continuing violation” theory. Instead, the Court has remanded the case to the U.S. Court of Appeals for the Ninth Circuit on the narrow ground that that court had not given adequate consideration to whether fiduciaries breached a duty to monitor those investments within the six years prior to suit. 

Background

Edison International is a holding company for a number of electric utilities and other energy interests. It provided a 401(k) plan serving 20,000 employees that was valued at $3.8 billion during the litigation.

The Edison plan offered employees a menu of possible investment options that included “institutional or commingled pools, forty mutual fund-type investments, and indirect investment in Edison stock known as a unitized fund.”

The Tibble plaintiffs, on behalf of current and former 401(k) plan beneficiaries, claimed Edison violated ERISA’s fiduciary duty of prudence by offering more expensive “retail class” shares of mutual funds, instead of relatively cheaper “institutional class” shares of the same funds. The three funds challenged in the Supreme Court appeal were added in 1999 (“the 1999 funds”); but suit was not filed until 2007. Three other funds were selected in 2002 (“the 2002 funds”), but those were not before the Supreme Court, since they were offered less than six years before the plaintiffs’ lawsuit.

Lower Court Decisions

The district court held that the plan fiduciaries had acted imprudently by selecting the 2002 funds, noting there was no basis for selecting the more expensive retail-class shares rather than the cheaper, virtually identical institutional shares. However, the district court found the same claims regarding the 1999 funds were barred by ERISA’s six-year limitations period.

On appeal to the Ninth Circuit, the plaintiffs asserted their claims were timely so long as the 1999 funds remained in the plan. In a friend-of-the-court filing, the U.S. Department of Labor argued in favor of a “continuing violation” exception to the six-year period, suggesting that ERISA fiduciaries would have no incentive to remove imprudent investments from plan offerings otherwise. 

The Ninth Circuit rejected the continuing-violation arguments, holding the “act of designating the investment for inclusion” triggers the limitations period absent evidence that “changed circumstances” gave rise to a new duty to conduct a “full diligence review” of existing funds. The Ninth Circuit explained that the “changed circumstances” approach was necessary to give meaning to ERISA’s six-year limitations period. A contrary view, if reasoned, could expose fiduciaries to liability for a protracted and indefinite period.

Supreme Court Decision

When it granted certiorari to review the case, the Supreme Court framed the “Question Presented” broadly:

Whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U. S. C. §1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.

It did not signal whether it would address the continuing-violation theory advocated by plaintiffs or the policy concerns underpinning the Ninth Circuit’s decision. 

The Supreme Court bypassed these issues, however. Couching its decision in traditional trust law, which requires a “regular review” of trust investments, and the Uniform Prudent Investor Act, which it viewed as embracing a continuing duty to monitor plan investments, the Court vacated the Ninth Circuit’s ruling and remanded for additional consideration of the fiduciaries’ ongoing duty to monitor the prudence of the 1999 funds. 

Implications

Tibble does not offer any express guidance to lower courts or practitioners on whether, for instance, ERISA recognizes a continuing-violation exception to a limitations defense. The Supreme Court’s emphasis on a wholly separate duty applicable to investment practices (a well-established duty to monitor investments) indicates that it has opted not to recognize any continuing-violation doctrine. Similarly, given the Court’s focus on the Uniform Prudent Investors Act, the application of Tibble should be limited to imprudent-investment claims, where there is a clearly established, ongoing duty to monitor (or at least those species of fiduciary claims where there is recognized duty of an ongoing nature).

Beyond that, the reach of Tibble may be fairly short because the Supreme Court expressly declined to address the scope of the fiduciary’s ongoing duties. Indeed, the Court did not provide guidance on how to evaluate those duties, except to hold that “changed circumstances” (that is, circumstances that would render an otherwise-prudent investment imprudent) was not the only scenario in which a fiduciary’s failure to re-evaluate investments might run afoul of ERISA. The Court also left open the possibility that the Ninth Circuit could deem the ongoing-duty claims waived if it finds they were not adequately preserved in the earlier appeal.

Nevertheless, plan administrators should keep an eye on the proceedings on remand for how the Ninth Circuit’s decision applies ERISA’s monitoring duty to defendants’ retention of the 1999 funds in the Edison plan. Although periodic re-evaluation of all plan investments is already a “best practice,” the decision on remand may offer guidance on particular circumstances that call for fiduciary scrutiny of specific investments.

Jackson Lewis attorneys in our Employee Benefits practice are available to answer inquiries regarding this case and discuss particular plans.

©2015 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

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