Are there time limits on a participant’s ability to challenge imprudent 401(k) investment fund offerings? Can participants challenge an investment fund selected ten or even twenty years ago? If so, will fiduciaries be subject to potential liability for losses going back decades?
The U.S. Supreme Court has just released its long-awaited decision in Tibble v. Edison, holding that participants are not prevented from challenging a plan fiduciary’s imprudent 401(k) investment choices if the investment was selected more than six years ago. This means that there is not a one-time six year window for challenging imprudent investment offerings.
Since we use these decisions as guides to help our clients avoid being sued, I’ll skip the procedural issues of interest to litigators and focus on what this means for plan committees.
The rules set out by the Supreme Court are fairly simple, though their application may not be. The Court said that the duty to prudently select investments and the duty to monitor them are separate. Under traditional trust law and ERISA, a trustee/fiduciary has an ongoing duty to monitor investments and remove imprudent ones. Fiduciary breach claims may be based on positive action or omissions, and suit may be brought within six years of the last act that constitutes a breach or violation, or the last date the fiduciary could have cured an omission, clearly extending the period for challenging failure to remove an imprudent fund from the lineup.
The Supreme Court didn’t give us guidance about how to fulfill the duty to monitor, sending the case back to the appellate court for further proceedings. However, some best practices and some limits on the claims that may be brought can be deduced from the decision and the facts.
What was the alleged violation in Tibble? The lower courts had found that the Tibble Committee was imprudent in offering three retail class mutual funds when lower cost institutional funds with virtually the same investments were available. These same claims were raised and erroneously dismissed in connection with three older funds. The Committee met quarterly to review plan investments and to review reports and recommendations from investment staff, but comparing the costs of different share classes was apparently not part of the quarterly review.
Obviously, fund costs should have been part of this review, but if committees prepare and use a review checklist in consultation with ERISA counsel, or have a comprehensive investment policy drafted with the help of ERISA counsel, the likelihood of missing major review items is minimized. Even today, we often see investment policy statements drafted by people who are not lawyers that focus on performance and fail to even mention the importance of reviewing costs and fees. Having regular meetings won’t help fiduciaries if they don’t focus on the right issues when they meet. And offering the best available investment choices to participants, and not merely avoiding imprudent ones, should be the goal of every committee. That is the best way to avoid investment challenges.
Although not discussed in the Supreme Court decision, in my view it is clear that breaching fiduciaries should not have an open-ended exposure to restore plan losses under the Tibble rules. The Department of Labor in its amicus brief sets forth its position that fiduciaries don’t have continuous exposure to restore losses because the losses must have occurred within the six years preceding suit. Further, the plaintiffs in the Tibble case did not try to claim losses for the entire period that the retail funds were in the plan.
At the end of the day, fiduciaries who follow good practices minimize the likelihood that they will ever have to argue that there are specific time limits on restoring plan losses.