On May 18, 2015, the U.S. Supreme Court issued a decision reinstating breach of fiduciary duty claims brought under the Employee Retirement Income Security Act (“ERISA”) by certain beneficiaries of the Edison International 401(k) Savings Plan (the “Plan”) against Edison International and certain others that the courts below had determined were time barred under ERISA’s six-year statute of limitations. In doing so, the Supreme Court established that the fiduciary duty under ERISA not only requires a 401(k) plan fiduciary to exercise due care in the initial selection of investment options for the plan, but also imposes a continuing duty on the fiduciary to monitor plan investments and remove imprudent ones.
In 2007, the plaintiffs filed a complaint in the U.S. District Court for the Central District of California alleging that the defendants breached their fiduciary duty under ERISA by, among other things, selecting the higher priced retail share classes of certain mutual funds to be offered through the Plan when lower priced share classes of the same funds were available. Three of the funds were added to the Plan in 1999; the other three were added in 2002.
With respect to the claims relating to the three funds added to the Plan in 2002, the District Court sided with the plaintiffs and found that the defendants had failed to act in accordance with ERISA’s fiduciary standards by selecting higher priced share classes for the Plan when lower priced share classes were available. The District Court stated that the defendants offered no credible explanation for the decision to offer the more expensive share classes and simply failed to consider less expensive share classes.
However, the District Court granted the defendants’ motion for summary judgment with respect to the claims relating to the three funds added to the Plan in 1999, concluding that the claims were untimely because they were filed more than six years after the funds were added to the Plan. Under ERISA, a breach of fiduciary duty claim must be filed no later than six years after “the date of the last action which constituted a part of the breach or violation” or “in the case of an omission the latest date on which the fiduciary could have cured the breach or violation.” The plaintiffs were permitted to argue that their claims were in fact timely because the funds in question underwent significant changes during the six-year statute of limitations period that should have prompted the defendants to conduct a full due diligence review and convert the retail share classes to less expensive classes. After hearing this argument, the District Court concluded that the plaintiffs had failed to show that the circumstances of the three funds added in 1999 had changed sufficiently during the six-year statutory period to require a prudent fiduciary to conduct a full due diligence review and convert the shares to lower priced classes.
In 2013, the U.S. Court of Appeals for the Ninth Circuit upheld the District Court’s decision. Following that decision, the plaintiffs filed a petition for certiorari with the Supreme Court requesting that the Supreme Court review the Ninth Circuit’s decision. The Supreme Court granted the petition on October 2, 2014, and arguments were heard on February 24, 2015.
On May 18, 2015, the Supreme Court, in a unanimous decision, vacated the Ninth Circuit’s decision to uphold the District Court’s granting of the defendants’ motion for summary judgment with respect to the claims relating to the three funds added to the Plan in 1999 and remanded the case for further proceedings with respect to those claims. In determining how to apply ERISA’s six-year statute of limitations, the Supreme Court considered the proper question to be whether the last action that constituted a part of the alleged breach of fiduciary duty occurred within the relevant six-year period. ERISA requires that a fiduciary must act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” The Supreme Court noted that the fiduciary standard under ERISA is derived from the common law of trusts and that courts should look to trust law in interpreting the contours of the ERISA standard. In this regard, the Supreme Court stated that, “under trust law, a fiduciary normally has a continuing duty…to monitor investments and remove imprudent ones,” which is a duty separate from the obligation to exercise prudence in the initial selection of investments. As such, the Supreme Court concluded that the
Ninth Circuit erred in applying the six-year statute of limitations based solely on the initial selection of investment options for the Plan and on significant changes thereto without considering the defendants’ continuing fiduciary obligation to review the appropriateness of investment options.