In April 2013 I reported on the 9th Circuit Court of Appeals decision in Tibble v. Edison International which involved an alleged breach of fiduciary duty by the Edison 401(k) Savings Plan committee selecting six retail mutual funds when institutional share classes were available. http://benefitsnotes.com/2013/04/ninth-circuit-decides-selection-of-retail-mutual-funds-was-a-breach-of-fiduciary-duty/
In the 2013 decision, the 9th Circuit Court of Appeals affirmed the District Court finding that the retention of the three funds purchased in 2002 was a breach of fiduciary duty under ERISA. The Court ruled that certain changes to these funds would have triggered the duty to do a full diligence review and direct conversion of the funds into lower priced institutional class funds. The 9th Circuit however denied the Plaintiffs’ claim with respect to three other mutual funds which were added in 1999 as being outside the 6 year statute of limitations, on the basis that those three funds had not undergone any significant “change in circumstances” that would have triggered a need for a full diligence review. The Plaintiffs petitioned the U.S. Supreme Court for review of the 9th Circuit’s holding.
On May 18, 2015, the U.S. Supreme Court reversed the 9th Circuit’s decision with respect to the three funds purchased in 1999 and remanded the case back to the 9th Circuit for further consideration, arriving at its decision applying the principles of the common law of trusts. The Supreme Court ruled that trustees and other fiduciaries have a continuing duty that is separate and apart from the duty to exercise prudence in selecting investments, to monitor and after due diligence, remove imprudent trust investments. So long as the plan participants allege that this duty to monitor was breached within the previous 6 years (the statute of limitations for fiduciary breach under ERISA), the case can continue.
The Supreme Court did not go any further than to remand the case under the guidelines described above. We will have to watch for later decisions in determining the scope of the liability and damages that can result from a breach of the duty to monitor. The lesson in the Supreme Court’s decision is that retirement plan committees cannot take comfort in the fact that mutual funds, and managers at the time of selection, report healthy investment performance figures. Plan committees are charged with a duty to continually monitor the funds and the managers that they select for changes and drops in performance. The failure to do so can result in personal liability. Qualified participant directed 401(k) and other defined contribution plans with large trust balances should consider retaining independent fiduciary investment advisors to assist in the ongoing diligence and monitoring of plan managers and funds. The analysis in advisors’ reports provided to plan committees and recommendations with respect to the replacement of imprudent funds will provide significant protection to plan fiduciaries from claims such as those faced by Edison in the Tibble case.