In a unanimous decision issued on May 18th, the United States Supreme Court held that employers have a continuing fiduciary duty to monitor the investment alternatives offered under the retirement plans they sponsor. The case, Tibble v. Edison International, involved a 401(k) plan, but applies equally to any qualified retirement plan with participant-directed investments.
Participants in the Edison International 401(k) Plan sued the Plan sponsor alleging that the Plan could have offered the same mutual funds available under the Plan using less expensive share classes, which would have reduced the expenses paid from the participants’ accounts. Plan participants claimed that Edison International breached its fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA) with respect to the investment options offered under the Plan. Both the lower court and the Ninth Circuit Court of Appeals dismissed the participants’ claims related to investment funds selected in 1999 because the lawsuit was brought in 2007, more than six years after the funds were originally selected to be offered under the Plan. The courts held that ERISA’s six-year statute of limitations for fiduciary breach claims started to run when the investment funds were selected.
The U.S. Supreme Court justices were unanimous in holding that the fiduciary duty to monitor investments under an ERISA-covered plan (like a 401(k) plan) is a “continuing duty” and that participants have six years from the date of an alleged failure to monitor or remove an imprudent investment option to bring a claim. As a result of this continuing duty, the six-year limitations period does not start to run as long as the imprudent investment option is still in the plan. The ruling also provided the following specific guidelines for plan sponsors:
- Plan sponsors or an investment fiduciary they retain have a duty to selectprudent investment options, and have a separate, continuing duty tomonitor the investment options to ensure that they continue to be prudent options.
- The plan sponsor or investment fiduciary has a duty to remove investment options that become imprudent.
- The sponsor or investment fiduciary's continuing duty to monitor investment options requires that they have a process in place to regularly review the investment options.
The Tibble case has now been sent back to the Ninth Circuit Court of Appeals to address the merits of the case in light of the Supreme Court’s ruling. Although the Supreme Court left many issues related to this “continuing duty” to monitor investment options for other courts to address, plan sponsors are now clearly on notice that this duty exists. As a result, plan sponsors should immediately consider the following:
- If you haven’t reviewed the investments offered under your retirement plan in some time you should do so now. In most plans, the employer sponsoring the plan is the fiduciary responsible for choosing investments. A plan recordkeeper may provide reports and assistance with the review, but the recordkeeper generally cannot or does not serve as a fiduciary to the plan.
- If not already in place, establish a process to regularly review the investment options offered under your 401(k) plan or other retirement plans. The establishment of a plan or benefits committee which meets regularly (generally quarterly) and is charged with this duty is an effective way to do this.
- The monitoring process should not only consider the performance of the investment options, but also the fees charged, the information and disclosures made available and any changes which have occurred with the investment fund (such as a change in the fund manager). In some cases, the plan sponsor may want to retain an independent consultant to select and monitor investments or to provide investment advice to the plan sponsor.
- If an investment option is no longer a prudent investment, the plan sponsor should remove that option and select a prudent investment alternative.
In light of the Tibble decision, plan sponsors should closely examine their oversight and responsibilities related to the investments under their retirement plans.