In a highly anticipated decision, the United States Supreme Court recently held that a 401(k) fiduciary breach lawsuit may proceed even when the claim is based on an imprudent selection of investment funds that occurred more than six years earlier, or beyond the six-year statute of limitations under the Employee Retirement Income Security Act (“ERISA”).
Until the Supreme Court’s decision in Tibble v. Edison Int’l, the six-year limitations period posed a significant roadblock for retirement plan participants challenging higher-cost funds, particularly those that remain in retirement plans for years after their initial selection. In a unanimous decision, the Supreme Court ruled that courts cannot dismiss these types of challenges without considering whether plan fiduciaries have fulfilled their independent and “ongoing duty to monitor” the investments during the six-year window before suit is filed. The Supreme Court’s decision signals that fiduciaries’ duty to monitor ERISA-governed plans is ongoing and just as important as their duty to exercise prudence in investment selection.
The Supreme Court’s decision is the latest in a long-running dispute between beneficiaries in the Edison 401(k) Savings Plan (hereafter “Tibble”), and plan fiduciaries, mainly Edison International (hereafter “Edison”). The suit was filed in 2007 to recover damages for alleged losses suffered by the plan from alleged breaches of fiduciary duties. Tibble argued that Edison violated its fiduciary duties with respect to three mutual funds added to the plan in 1999 and three mutual funds added to the plan in 2002. Tibble claimed that the investments at issue were offered to the plan participants as higher-priced retail-class mutual funds, when materially identical lower-priced institutional-class mutual funds were available.
Tibble argued with success that Edison fiduciaries acted imprudently by offering higher priced retail-class mutual funds as plan investments in 2002. The District Court held that, as to the three funds added to the plan in 2002, Edison “had not offered any credible explanation for offering retail-class, i.e., higher priced mutual funds that cost the Plan participants wholly unnecessary administrative fees, and it concluded that, with respect to those mutual funds, [Edison] failed to exercise the care, skill, prudence and diligence under the circumstances that ERISA demands of fiduciaries.” As to the three mutual funds added to the plan in 1999, however, the District Court held that Tibble’s claims were untimely because the 1999 “mutual funds were included in the plan more than six years before the complaint was filed in 2007,” and, thus, “the six-year statutory period had run.” Tibble argued that the claims as to the 1999 mutual funds were nonetheless timely because these funds underwent significant changes within the six-year statutory limitations period that should have prompted Edison to undertake a full due-diligence review and convert them to lower-priced institutional-class mutual funds. According to the District Court, however, “the circumstances had not changed enough within the six-year statutory period to place Edison under an obligation to review the mutual funds and to convert them to lower-priced institutional-class funds.”
The Ninth Circuit Court of Appeals subsequently affirmed the District Court’s decision, concluding that Tibble’s claims were untimely because Tibble had not established a change in circumstances that might trigger an obligation to conduct a full due-diligence review of the 1999 funds within six years after they were selected.
The Supreme Court Vacates And Remands The Ninth Circuit’s Decision
In a unanimous decision, the Supreme Court determined that the “Ninth Circuit erred by applying [the six-year] statutory bar to a breach of fiduciary duty claim based on the initial selection of the investments without considering the contours of the alleged breach of fiduciary duty.” Specifically, the Supreme Court held that the Ninth Circuit faulted when it focused on the act of “designating an investment for inclusion” to start the six-year period. It found that the “Ninth Circuit did not recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.” The Supreme Court pointed to its previous decision in Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 570, which held that an investment trustee has “a continuing duty – separate and apart from the duty to exercise prudence in selecting investments at the outset – to monitor, and remove imprudent, trust investments.” The Supreme Court reasoned that “so long as a plaintiff’s claim alleging breach of the continuing duty of prudence occurred within six years of suit, the claim is timely.”
Accordingly, the Supreme Court remanded the case back to the Ninth Circuit “to consider [Tibble’s] claims that Edison breached its duties within the relevant six-year statutory period . . ., recognizing the importance of analogous trust law.” However, the Supreme Court made clear that it “expresses no view on the scope of [Edison’s] fiduciary duty in this case, e.g., whether a review of the contested mutual funds is required, and, if so, just what kind of review.” On a final point, the Supreme Court also noted that Edison argued that Tibble did not raise the claim that Edison committed new breaches of the duty of prudence by failing to monitor their investments and remove imprudent ones absent a significant change in circumstances; however, the Supreme Court left “any questions of forfeiture for the Ninth Circuit on remand.”
The Impact Of the Supreme Court’s Opinion
The Supreme Court leaves it to the lower courts to determine what the duty to monitor should have been, and whether a claim is timely, in any given case. For Tibble, the risk is that the Ninth Circuit makes its decision on the procedural point – that is, the failure to allege a fiduciary breach from a lack of or inadequate monitoring, which is the last point raised by the Supreme Court – without considering the scope of the duty to monitor. For Edison, and fiduciaries generally, the aftermath of the Supreme Court’s decision may mean more protracted litigation. We now know that a distinct and ongoing duty exists to monitor investments, separate from a duty to exercise reasonable prudence in the initial selection of investments. The duty to monitor survives the passage of time. Fiduciaries have an ongoing duty to monitor all plan investments, regardless of how long they have been in the plan. As a practical matter, fiduciaries should conduct regular reviews of existing investments and document such reviews. At the very least, the Supreme Court’s decision is a reminder for fiduciaries to have a prudent and established process in place for plan review and administration, in part to avoid costly litigation.