The Supreme Court holds that ERISA’s limitations period does not bar an alleged breach for failure to monitor a plan’s investments.
On May 18, the Supreme Court issued a unanimous decision in Tibble v. Edison International, holding that an ERISA fiduciary has an ongoing duty to monitor plan investments and that allegations of a breach of this duty may give rise to a timely claim even when a challenge to the fiduciary’s initial selection of that same investment would be barred by ERISA’s six-year statute of repose.
In reaching this decision, the Supreme Court made clear that before finding a claim for breach of fiduciary duty untimely, courts must first “consider the contours of the alleged breach,” which often means turning to the law of trusts. Doing so here, the Court held that ERISA, like trust law, imposes upon a plan fiduciary a “continuing duty to monitor trust investments and remove imprudent ones,” which is distinct from the duty to prudently select the investment options in the first instance. Thus, an allegation that a fiduciary breached the duty to monitor may be timely under ERISA’s six-year period of repose, even though the initial selection of the investment occurred outside of that period—and even though there was no “significant change in circumstances” that would have caused the fiduciary to revisit its initial selection decision.
Following closely on the heels of another unanimous ruling that scuttled the fiduciary-friendly “presumption of prudence” previously applicable to claims challenging investments in employer stock, the Court’s decision in Tibble suggests a reading of ERISA’s fiduciary duties that could open the door for additional “failure to monitor” claims. However, the Court offered little insight into what an ERISA fiduciary’s duty to monitor actually entails, and instead remanded to the Ninth Circuit to address that question.
Although the full implications of the Supreme Court’s decision and the scope of the duty to monitor therefore remain uncertain, Tibble confirms the common understanding among many ERISA practitioners, plan sponsors, and plan fiduciaries that fiduciaries have a continuing duty to periodically monitor a plan’s investment options.
Lower Court Proceedings in Tibble
Under ERISA, a plaintiff generally must bring a claim for breach of fiduciary duty within no more than six years after “the date of the last action which constituted a part of the breach or violation.” 29 U.S.C. § 1113. This six-year period is considered a statute of repose which, as opposed to an ordinary statute of limitation, establishes “an absolute barrier to an untimely suit.” Lower courts have grappled with what constitutes the alleged breach in certain circumstances, including when selecting and maintaining an investment option in an ERISA plan. In particular, several courts have held that because ERISA’s six-year limitations period is a statute of repose, the so-called “continuing violation” theory does not apply to convert an alleged breach that occurred outside of the limitations period into a timely claim merely because that breach continued into the limitations period. Rather, in those circumstances, the six-year period of repose was triggered by the underlying breach, and absent some change in circumstances establishing a new or distinct breach, a plaintiff must sue within six years.
The plaintiffs in Tibble were participants in a 401(k) plan offered by Edison International who claimed the plan’s fiduciaries invested in a series of mutual funds that charged high fees, when identical—but cheaper—funds were readily available. The district court agreed with plaintiffs, but only for three funds purchased for the plan in 2002, within six years of when plaintiffs filed suit in 2007. Three other funds at issue were purchased in 1999, and the district court granted summary judgment after finding plaintiffs’ claims untimely because more than six years had passed, with no significant change in circumstances triggering a fiduciary obligation to re-evaluate offering those funds at their existing cost. Finding that plaintiffs had alleged only that the initial breach—purchasing the mutual funds with excessively high fees—continued unabated into the six-year period of repose, the district court concluded that plaintiffs had failed to identify conduct within the six-year repose period trigging a new, distinct fiduciary breach.
The Ninth Circuit affirmed the district court’s ruling as to the three 1999 funds. In doing so, the Ninth Circuit specifically rejected the plaintiffs’ “continuing violation” arguments, reasoning that the mere continued offering of an allegedly imprudent investment, without more, cannot trigger a new breach upon which plaintiffs can base a timely claim. The court wrote that such an approach “would make hash out of ERISA’s limitation period and lead to an unworkable result.” Next, the Ninth Circuit pointed out that the district court had properly allowed plaintiffs the opportunity at trial to prove that “changed circumstances” occurring within the repose period would have prompted a full “due diligence” review and, in turn, led prudent fiduciaries to replace the existing mutual funds. Because plaintiffs had failed to prove such changed circumstances at trial, however, the Ninth Circuit affirmed the district court’s judgment that plaintiffs’ claims were time-barred.
The plaintiffs filed a petition for certiorari with the Supreme Court, which was granted on October 2, 2014.
The Supreme Court’s Opinion
The Supreme Court framed the question for review as whether a fiduciary’s retention of an investment can be an “action” or “omission” that triggers ERISA’s six-year repose period. To answer this question, the Court began by criticizing the Ninth Circuit for incorrectly defining the breach at issue and, in particular, for failing to consider the “nature of the fiduciary breach” and the “role of the fiduciary’s duty of prudence under trust law.” The Court next turned to the common law of trusts and observed that a trustee is required to conduct a regular review of trust investments “with the nature and timing of the review contingent on the circumstances.” The Court remarked that “a trustee has a continuing duty to monitor trust investments and remove imprudent ones,” and that this duty exists—and can therefore be breached—separate and apart from the trustee’s duty to act prudently when selecting plan investments.
Accordingly, the Court held in rather general language that a plaintiff may allege a separate breach of fiduciary duty claim under ERISA for the failure “to properly monitor investments and remove imprudent ones” and that such a claim would be timely so long as the alleged breach of this duty occurred within six years before filing suit. The Court therefore disagreed with the Ninth Circuit’s suggestion that only significantly “changed circumstances” could give rise to a new, separate breach falling within the repose period. At the same time, however, the Court declined to provide any specific guidance on what exactly the “duty to monitor” entails. Rather, the Court noted that the parties “disagree[d]” as to “the scope” of the duty to monitor, that the Court “express[ed] no view” on the scope of the defendants’ duties in this case, and remanded to the Ninth Circuit to consider whether the defendants had “breached their duties [whatever they might have entailed] within the relevant 6-year period under § 1113, recognizing the importance of analogous trust law.”
Finally, in the closing sentences of its opinion, the Court briefly acknowledged Edison’s argument that the plaintiffs had not raised any claim or argument in the district court that the defendants had “committed new breaches of the duty of prudence by failing to monitor” plan investments after the period of repose. The Court, however, elected to “leave any questions of forfeiture for the Ninth Circuit on remand.” As a result, the Ninth Circuit’s handling of the forfeiture issue on remand may well obviate any determination of the scope of the duty to monitor and whether that duty was actually violated in this particular case.
The Tibble decision presents few obvious implications for those plan sponsors and fiduciaries who have long engaged in periodic monitoring of retirement plan investments, although those who have not engaged in intermittent reviews will now wish to do so. Nevertheless, the decision is a strong reminder of the uncertainty surrounding the precise scope of that duty. For example, one of the issues that remains unanswered in Tibble is the extent to which fiduciaries must monitor investment fund fees. For example, it is one thing to require fiduciaries to monitor whether a plan offers a mutual fund at the lowest cost available for that particular fund. It is quite another undertaking, however, to require fiduciaries to monitor the market on an ongoing basis to determine whether some non-identical but comparable fund might be available for an even lower price. Where the duty to monitor falls along this spectrum will doubtless become the subject of future litigation. In the meantime, while the Tibble decision is not cause for alarm, it does suggest that now may be a good time for plan sponsors and fiduciaries to revisit their existing processes and procedures for monitoring the continued prudence of ERISA plan investments.
From a litigation perspective, the Tibble decision will make it more difficult to dispose of imprudent investment claims on timeliness grounds—at least where plaintiffs have taken care to frame their claims in terms of a breach of the duty to monitor plan investments. The Supreme Court stopped short of embracing the so-called “continuing violation” theory for claims of breach of fiduciary duty. However, its recognition that a new fiduciary breach may be triggered where it is tied to an alleged failure to monitor a given investment provides plaintiffs with a new avenue for pleading around precedents in several circuits foreclosing arguments that fiduciary breach claims are timely merely because they are “continuing” in nature.
Finally, Tibble may signal a trend in Supreme Court decisions toward a more expansive view of ERISA fiduciary duties, at least as they apply to the management of retirement plan investments. Not only does Tibble include several openly worded passages that can be expected to fuel future claims predicated on an alleged failure to monitor plan investments, it comes close on the heels of a Court decision just last year that rejected the fiduciary-friendly “presumption of prudence” long endorsed by all seven US Circuit Courts of Appeals that had addressed the issue.