On Monday, May 18, 2015, the United States Supreme Court issued a ruling which could facilitate suits by 401(k) plan participants against their employers for offering investment options that erode their retirement savings through excessive fees. In Tibble v. Edison International, Slip Op. No. 13-550, 575 U.S. ____ (2015), participants in the retirement plan administered by the California-based energy company Edison International asserted that Edison’s fiduciaries acted imprudently by offering higher priced retail-class mutual funds as plan investments when materially identical but lower priced institutional-class mutual funds were available. Because the Employee Retirement Income Security Act (ERISA) requires a breach of fiduciary duty complaint to be filed no more than six years after “the date of the last action which constitutes a part of the breach or violation” or “in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation” (29 U.S.C. §1113), the district court originally hearing the case held that the petitioners’ complaint as to the three 1999 funds was untimely because they were included in the plan more than six years before the complaint was filed. On appeal, the Ninth Circuit Court of Appeals ruled that the employees did not act expeditiously enough to challenge the investment options offered in Edison’s retirement plan. See, Tibble v. Edison Int’l, 711 F. 3d 1061 (Ninth Cir. 2013).
In a unanimous ruling by the United State Supreme Court, Justice Stephen Breyer, writing for the court, disagreed with the Ninth Circuit Court of Appeals, finding that employers have a continuous responsibility to monitor fees. The continuing duty to review investments includes a duty to remove imprudent investments. The Supreme Court’s decision focused on the Uniform Prudent Investor Act, thus signaling that application of its decision in Tibble should be limited to imprudent-investment claims, where there is a clearly established, ongoing duty to monitor, or at least those types of fiduciaries claims where there is a recognized duty of an ongoing nature. While the question presented was broad, the Court’s decision is narrow as it did not provide guidance on how to evaluate the newly imposed 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 conflict with ERISA. The Court also left open the possibility that the Ninth Circuit Court of Appeals could deem the ongoing duty claims waived if it finds that they were not adequately preserved in the earlier appeal. The case was remanded to the lower courts for further litigation on the scope of the company’s duty to monitor investment options.
In the wake of this decision, employers who sponsor 401(k) plans should take a hard look at plan investment options on a consistent, periodic basis and consult with their plan administrator to assure that sufficient low cost high yield options are available across the platform. Although periodic re-evaluation of all plan investments is already considered a “best practice” for plan administrators and plan sponsors, the Tibble decision on remand might offer further guidance on particular circumstances that call for fiduciary scrutiny of specific investments.