In May, 2015, a unanimous U.S. Supreme Court in Tibble v. Edison International explained the fiduciary duty rule as it applies to 401(k) Plan investments. Although the case involved considerable procedural detail, the issue before the Court was a simple one:
• is it enough for the ERISA duty of prudence that the fiduciary make prudent decisions to invest in the first instance, or
• must the fiduciary also make prudent decisions about whether it should sell assets (or otherwise change the composition of the plan’s portfolio)?
The Court determined that fiduciaries who select investment options for 401(k) plans have a continuing duty under the Employee Retirement Income Security Act of 1974 (ERISA) to monitor their selections and remove imprudent investment options.
The Court of Appeals for the Ninth Circuit, from whence the case originated, had affirmed a trial court dismissal of certain claims brought against fiduciaries of the Edison 401(k) Savings Plan (Plan) as untimely because they related to investment options that were selected for the Plan in 1999, more than six years before the complaint was filed in 2007.
This ruling opens the door to claims challenging the prudence of plan fiduciaries’ retention of investment options within 401(k) plans, including options that were selected outside the limitations period established under ERISA.
ERISA imposes employee benefit plan fiduciaries with a duty of prudence that requires the fiduciary to “discharge his duties with respect to a plan … with the care, skill, prudence, and diligence” that a prudent person would use under similar circumstances. Plan beneficiaries, and a few other groups, can bring a civil action alleging breach of fiduciary duty to recover any Plan losses related to that breach. Those claims, generally, must be brought within six years after “the date of the last action [by the fiduciary] which constituted a part of the breach” or, if earlier, within three years after the earliest date on which the Plaintiff had actual knowledge of the breach.
In Tibble, the firm’s 401(k) plan invested in a series of mutual funds in 1999 and another series in 2002. Participants in the Plan filed suit in August 2007 against Edison International and other plan officials, alleging that the Defendants had breached their duty of prudence by offering retail classes of mutual fund shares as investment options when institutional share classes that have lower management fees could have been made available to Plan participants.
The U.S. District Court for the Central District of California dismissed the Plaintiff’s claims with respect to three mutual funds that had been added as investment options under the Plan in 1999 because they were added more than six years before the complaint was filed. According to the District Court, the Plaintiffs had failed to establish that the circumstances relating to those investments had changed to such an extent that a prudent fiduciary would undertake a full-scale due diligence review of the investments within the six-year limitations period.
On appeal, the Plaintiffs argued that the Defendants committed a continuing breach of fiduciary duty for so long as the challenged investments remained as options within the Plan. In spite of this argument, the Ninth Circuit affirmed the ruling of the District Court.
In vacating the Ninth Circuit and remanding the case, Justice Stephen Breyer, writing for the Court, noted that the Court of Appeals had erred by failing to recognize the law of trusts, from which ERISA’s duty of prudence is derived. Like the opinion Justice Breyer wrote for the Court last year in Fifth Third Bancorp v. Dudenhoeffer, the opinion suggests that the basic concept of prudence compels the result so clearly that the Court can’t even find contrary arguments to consider.
The result is an opinion that strings together broad statements about the ERISA duties. Moreover, in contrast to Fifth Third, in which the Court balanced its ERISA message with a cautionary discussion of the perils of stock-drop class actions, the opinion contains nothing to water it down. A few quotes convey the tone:
• “Under 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.”
• “The trustee must systematically consider all the investments of the trust at regular intervals to ensure that they are appropriate.”
• “When the trust estate includes assets that are inappropriate as trust investments, the trustee is ordinarily under a duty to dispose of them within a reasonable time.”
Accordingly, a claim alleging that the Defendants failed to prudently monitor and remove the investments is still timely as long as the alleged failure to monitor occurred within the limitations period. This case, though Defendants would like to argue is just a statute of limitations case, has broadened the rights of beneficiaries seeking to recover for bad investments by the Plan.
In fact, as we have previously written, several major universities have since been sued over their plan investments. Specifically, New York University, the Massachusetts Institute of Technology, Yale University, Duke University, the University of Pennsylvania, Johns Hopkins University, and Vanderbilt University all face proposed class actions accusing the schools of causing retirement plan participants to pay millions of dollars in excessive fees.
Sources: scotusblog.com and skadden.com
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