On May 18, 2015, the United States Supreme Court issued its unanimous opinion in Tibble v. Edison Int’l, 2015 U.S. LEXIS 3171 (U.S. 2015), a seminal case involving ERISA’s six-year statute of limitations for breach of fiduciary duty claims.  The Supreme Court granted certiorari in Tibble to address the Ninth Circuit Court of Appeals’ decision to dismiss breach of fiduciary duty claims as untimely.

The petitioners in Tibble were participants in the Edison International 401(k) Savings Plan who argued, among other things, that Edison violated its fiduciary duties under ERISA with respect to three mutual funds added to the Plan in 1999.  Specifically, the petitioners argued that Edison violated its fiduciary duties by “offering higher priced retail-class mutual funds as Plan investments when materially identical lower priced institutional-class mutual funds were available.”

The Ninth Circuit affirmed the district court’s decision that the petitioner’s claims were untimely because the 1999 funds were added to the Plan more than six years before the complaint was filed in 2007, and therefore, fell outside the six-year statute of limitations period under ERISA.  In so holding, the Ninth Circuit reasoned that the initial act of including the funds in the Plan was the action that triggered the running of the statute of limitations and that there had not been a significant enough change in circumstances to trigger an additional obligation to review and change the investments.

The Supreme Court rejected the Ninth Circuit’s reasoning, noting that it failed to consider the general principles of trust law from which ERISA’s fiduciary duties are derived.  The Supreme Court explained that “[u]nder trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”  Therefore, the Supreme Court held that because Edison had a continuing duty to monitor the funds, as long as the alleged breach of that duty occurred within six years of the petitioners’ complaint, the petitioners’ claims would be timely.  Rather than expressing a view on whether Edison actually breached its duty of prudence, however, the Supreme Court remanded the case back to the Ninth Circuit, instructing it to consider the general principles of trust law in making its decision.

The Tibble decision makes abundantly clear that fiduciaries of ERISA retirement plans have a continuing duty to monitor the plan’s investment options and remove imprudent ones.  Likewise, plan sponsors who delegate the investment functions to outside investment advisors will be responsible for ensuring the investment advisor continues to monitor the prudence of the plan’s investment options.  Under Tibble, the six-year statute of limitations does not necessarily start, for the first and only time, on the initial decision to add an investment option to a plan or upon a significant change in circumstances related to the investment.  Instead, the plan fiduciary’s responsibility to monitor the prudence of an investment is ongoing, and any statute of limitations that might apply would start any time a plan fiduciary fails to monitor the plan’s investment options appropriately or any time an investment option becomes imprudent.  Given this “continuing duty” rule, plan fiduciaries may find themselves facing larger classes and greater potential liability in the increasing wave of “excessive fee” ERISA class actions.

Notably, the Supreme Court did not specify what steps a plan fiduciary must take to fulfill its duty to monitor plan investments, leaving it to the lower courts to decide.  Calfee will continue to monitor the case to see if the Ninth Circuit provides any guidance on how plan fiduciaries may satisfy their duty to monitor.  In the meantime, plan sponsors, and their investment advisors, should regularly assess the prudence of the plan’s investment options under a formal, documented review process that uses both quantitative (such as performance and fees) and qualitative metrics (such as management’s reputation and management turnover).  Plan fiduciaries should remove or modify any investment options determined to be imprudent under the procedures set forth in the plan’s investment policy statement.