On May 18, 2015, the U.S. Supreme Court rendered a unanimous decision that may pave the way for more lawsuits against ERISA plans alleging a breach of fiduciary duty regarding plan fees and choice of investment alternatives.
In Tibble v. Edison International, No. 13-550, 2015 WL 2340845 (U.S. May 18, 2015), a suit was brought against ERISA plan fiduciaries alleging that it was a breach of fiduciary duty to offer retail funds as an investment alternative when lower-cost materially equivalent institutional funds were available. With respect to some of the retail funds, it had been more than six years since the funds were initially selected. The lower courts held that because there had not been a significant change in circumstances since the initial selection of such investment alternatives, the claims were time-barred by the applicable six-year statute of limitations.
The Supreme Court disagreed. The unanimous decision clearly stated that in addition to the well-known fiduciary duty to prudently select investment alternatives available under an ERISA plan, there is a separate fiduciary duty to regularly monitor such investment alternatives and to remove investment alternatives that are no longer prudent. This duty to regularly monitor applies whether or not there has been a significant change in circumstances since the investment alternatives were first selected.
This holding means that not only do fiduciaries of ERISA plans need to worry that an investment alternative was “prudent” when first selected, but they must also regularly consider if it is prudent to retain the investment alternative, regardless of whether circumstances have significantly changed. Although this outcome was largely expected, it provides clear authority that ERISA plan fiduciaries who fail to regularly monitor investment alternatives and take appropriate action may be subject to litigation by plan participants. In addition, plan participants may now be able to refile claims that were originally time-barred.
The Supreme Court explicitly declined to articulate what the continuing duty to monitor should look like, or whether the level of review utilized in Tibble was sufficient. However, in analogizing trust law to ERISA plans, the Supreme Court offered the following quotes, which the lower courts will undoubtedly analyze for the foreseeable future:
“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.”
“When the trust estate includes assets that are inappropriate as trust investments, the trustee is ordinarily under a duty to dispose of them within a reasonable time.”
By preventing the lower courts from immediately rejecting a lawsuit based on the initial selection date of an investment alternative, it will now likely be easier for 401(k) plan participants to challenge investment options added to a plan more than six years prior to filing suit, whether or not there has been a significant change in circumstances since the initial selection. Our team is prepared to offer recommendations to plan fiduciaries regarding procedures to select and monitor investment alternatives in an effort to avoid potential litigation, as well as to handle any litigation that is brought.