Supreme Court Affirms Duty to Monitor Plan Investments
- May 29, 2015
In a unanimous decision last week, the U.S. Supreme Court confirmed in Tibble v. Edison International that plan fiduciaries who select investment options for 401(k) plans and other ERISA-covered retirement plans have a continuing duty to monitor those investment options. The Tibble decision vacated an earlier Ninth Circuit Court of Appeals decision in which claims against plan fiduciaries were dismissed based on ERISA’s six-year statute of limitations since the claims were filed more than six years after the relevant investment options were initially selected for the plan.
The Supreme Court’s decision will undermine a plan fiduciary’s ability to assert a statute of limitations defense based on when an investment option was added; rather, the six year statute of limitations will be measured from the alleged breach of the duty to monitor the investment. This duty to monitor generally continues as long as the investment remains in the plan, thereby resulting in what some would call a rolling six-year statute of limitations period. However, the Supreme Court did not detail the scope of the duty to monitor, except to indicate that the nature of the duty depends on the circumstances. The Supreme Court sent the case back to the Ninth Circuit to determine the contours of that duty and whether there was in a fact a breach by the plan fiduciaries.
The Tibble case arose when participants in Edison’s 401(k) plan sued the plan sponsor claiming that it breached its fiduciary duty by offering retail-class mutual funds under the plan rather than lower fee institutional-class versions of the same funds. Both the lower court and then the Ninth Circuit Court of Appeals dismissed the claims because the lawsuit was brought more than six years after the funds were initially selected and the participants did not show that circumstances had significantly changed within the six-year statute of limitations period to require reexamination of the funds. During oral argument before the Supreme Court, the parties ultimately agreed that fiduciaries have a continuing duty under ERISA to monitor plan investments but disagreed regarding the scope of that duty and when it arises. While the plan fiduciaries argued that the duty to monitor is triggered only by changed circumstances that would require a close review, the Supreme Court looked to the common law of trusts and held that plan fiduciaries have a continuing duty to monitor plan investments to confirm they remain appropriate and remove them when they are no longer prudent.
The Court articulated that this duty is separate from the duty to exercise prudence when initially selecting plan investments. The Supreme Court found that the six year statute of limitations is satisfied if the claim for breach of the duty to monitor is filed within six years of the alleged violation. Now the Ninth Circuit will need to review the monitoring process of the plan fiduciaries in this case and assess whether it was sufficient.
This Tibble decision confirms current fiduciary best practices to have a process in place to regularly review a plan’s investment options following their initial selection to ensure they remain prudent. Fiduciaries also should ensure that the processes themselves and decisions made in accordance with those processes are documented. The decision also highlights the growing skepticism regarding use of retail-class mutual funds despite the availability of lower cost institutional-class funds that otherwise are identical. While the Tibble decision certainly makes it easier for plaintiffs to overcome a statute of limitations defense, they still have to tackle the merits of the alleged violation of the duty to monitor in light of the applicable circumstances.