U.S. Supreme Court Decision Regarding the Fiduciary Dutyto Monitor 401(K) Plan Investments
On May 18, 2015, the United States Supreme Court (the “Supreme Court”) held in TIBBLE ET AL. v. EDISON INTERNATIONAL ET AL. that under the Employee Retirement Income Security Act (“ERISA”), a plaintiff may timely commence a claim for breach of fiduciary duty within six years of the breach of a continuing duty of prudence in selecting investments. The case concerned when the role of a fiduciary in monitoring a plan’s performance can trigger liability under ERISA.
In 2007, petitioners, beneficiaries of the Edison 401(k) Savings Plan (“Plan”), sued Plan fiduciaries, respondents Edison International and others, to recover damages for alleged losses suffered by the Plan from alleged breaches of respondents’ fiduciary duties with respect to higher priced retail-class mutual funds added to the Plan as Plan investments during 1999 and 2002 when materially identical lower priced institutional-class mutual funds were available.
Pursuant to ERISA’s statute of limitations provision – which requires a breach of fiduciary duty complaint to be filed no more than six years after “the date of the last action which constitutes 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 (29 U.S.C. § 1113), – the District Court held that petitioners’ complaint as to the 1999 funds was untimely because they were included in the Plan more than six years before the complaint was filed. In so ruling, it stated that the circumstances had not changed enough within the 6-year statutory period to place respondents under an obligation to review the mutual funds and to convert them to lower priced institutional-class funds. The Ninth Circuit affirmed, concluding that petitioners had not established a change in circumstances that might trigger an obligation to conduct a full due diligence review of the 1999 funds within the 6-year statutory period.
The Supreme Court unanimously held that the Ninth Circuit erred by applying § 1113’s statutory bar to the breach of fiduciary duty claimed without considering the contours of the alleged breach of fiduciary duty. ERISA’s fiduciary duty as held by the Supreme Court is “derived from the common law of trusts” which provides that a trustee has a continuing duty-separate and apart from the duty to exercise prudence in selecting investments at the outset-to monitor, and remove imprudent, trust investments. Therefore, as long as a plaintiff’s claim alleging breach of the continuing duty of prudence occurred within six years of suit, the claim is timely. The case was remanded for the Ninth Circuit to consider petitioners’ claims that respondents breached their duties within the relevant 6-year statutory period under § 1113, recognizing the importance of analogous trust law.
Implications to other Retirement Plans
This Supreme Court decision emphasizes that fiduciaries must on a continuing basis monitor investments and remove imprudent ones or those that impose excessive fees from their plans. It also casts a shadow of doubt into the protection of fiduciaries under ERISA’s statute of limitations provision with regards to fiduciary omissions.
This document has been prepared for information purposes only and is not intended as, and should not be relied upon as legal advice. If you have any questions or comments about the matters discussed in this notice, wish to obtain more information related thereto, or about its possible effect(s) on policy or operational matters, please contact us.
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