Selection of Plan Investment Alternative Is Not a One-Time Event

HIGHLIGHTS:

  • The Supreme Court ruled that the statute of limitations does not bar the breach of fiduciary duty claim in light of the ongoing duty to monitor trust investments.
  • Initial selection of an investment alternative is not a one-time isolated event. Fiduciaries must revisit investments at regular intervals and as circumstances change.
  • Tibble v. Edison International is particularly noteworthy since the issue was the reasonableness of mutual fund fees and the events in question occurred before the fee disclosure reforms under Section 408(b)(2) of ERISA. Coupled with Section 408(b)(2) of ERISA, Tibble may lead to further participant lawsuits.

In Tibble v. Edison International, 13-550 (U.S. May 18, 2015), the U.S. Supreme Court ruled that the Employee Retirement Income Security Act of 1974 (ERISA) requires ERISA plan fiduciaries to monitor plan investments for suitability on an ongoing basis – not just at the time of selection. In addition, the Supreme Court ruled that the six-year statute of limitations (SOL) applicable to breach of fiduciary duty claims under ERISA begins running from the last act or omission in violation of the ongoing duty to monitor investments and not from the time of initial selection.

The facts in Tibble are not uncommon for many plan sponsors and warrant a brief recitation. Edison is the sponsor of the Edison 401(k) Savings Plan (the "Plan"), which is a tax-qualified 401(k) retirement plan pursuant to which participants direct the investment of their accounts among a group of investment alternatives selected by the Plan’s fiduciaries. In both 1999 and 2002, Edison added three retail class mutual fund investment options to the Plan. In 2007, a class of Plan participants brought suit alleging that Edison and related fiduciaries were imprudent in their selection of the retail funds and breached their fiduciary duty to the Plan and its participants by not using its negotiating power to obtain identical funds in the lower-priced institutional class.

The District Court agreed with the plaintiffs with respect to the three funds selected in 2002 but ruled that the claims in connection with the 1999 funds were time-barred because six years had passed since the initial selection of the funds. The plaintiffs argued that the claims centered around the 1999 funds should be permitted to go forward because significant changes with the funds had occurred since 1999 and that a “prudent fiduciary would have undertaken a full due-diligence review,” and that the failure to do so was a breach of duty in and of itself. While the District Court allowed the plaintiffs to make the argument, the District Court found that the plaintiffs did not adequately prove that a prudent fiduciary would have undertaken a full review in light of the circumstances.

On appeal, the Ninth Circuit affirmed the District Court’s ruling and found that the participants' claims were time-barred because the plaintiffs “had not established a change in circumstances that might trigger an obligation to review” the funds in question and make changes if prudent to do so. The Ninth Circuit deferred to the initial selection process and found “only a significant change in circumstances could” potentially trigger a new a breach of duty and thus restart the six-year SOL.    

The Supreme Court, relying heavily on established trust law, found that ERISA fiduciaries have an ongoing duty to monitor investments through regular reviews of plan alternatives and make changes when it is prudent to do so – not just when there are significant changes in circumstances. The Supreme Court was not persuaded by the Ninth Circuit’s concern that current fiduciaries may be held liable for decisions made decades earlier. The Supreme Court did not find that Edison and the related fiduciaries had breached their duties but that the analytical framework applied by the Ninth Circuit was incorrect. Accordingly, the Supreme Court remanded the case back to the Ninth Circuit to consider the facts of the case in light of the Supreme Court’s ruling and the well-established trust law principles that the Supreme Court relied on in its decision.

The Process of a Fiduciary's Decision Is Often a Determinant of Prudence

The lesson of Tibble is that fiduciaries must be proactive in carrying out their duties and stay current on facts and information that might affect the plans to which they have a duty. Often times, whether a fiduciary has breached his or her duty is not determined by the outcome of a decision but the process that went into the decision, and whether the process demonstrated prudence. Many cases hinge on the following three simple questions:

  1. Did the fiduciary take reasonable measures to stay informed?
  2. Did the fiduciary give due consideration to the issue?
  3. Did the fiduciary consult an expert when appropriate to do so?

Whether a fiduciary should or should not have acted can always be debated but a lack of process leading up to an act or omission is often fatal to the defense in a breach of fiduciary duty case.

Tibble is particularly noteworthy since the issue was the reasonableness of mutual fund fees and the events in question occurred before the fee disclosure reforms under Section 408(b)(2) of ERISA. Coupled with Section 408(b)(2) of ERISA, Tibble may lead to further participant lawsuits. Even if a fiduciary is not charged with overseeing plan investments or fees, fiduciaries should consider that there is a co-fiduciary liability under ERISA and that each fiduciary is charged with stopping or mitigating a breach of duty when and if it is reasonable to do so. 

Action Items

Plan administrators, sponsors and other fiduciaries should take the following steps in light of Tibble:

  1. Establish a plan investment committee along with an appropriate charter and investment policy.
  2. Require the investment committee to meet regularly during the plan year (preferably on a quarterly basis).
  3. Require the investment committee to regularly monitor and discuss plan investment options for suitability and consult with expert investment advisors and legal counsel when appropriate to do so.
  4. Take steps to ensure all vendors are complying with their disclosure requirements under ERISA.
  5. Comply with all required disclosure requirements under ERISA.