Are there time limits on a participant's ability to
challenge imprudent 401(k) investment fund offerings? Can
participants challenge an investment fund selected ten or even
twenty years ago? If so, will fiduciaries be subject to potential
liability for losses going back decades?
The U.S. Supreme Court has just released its long-awaited
decision in Tibble v. Edison, holding that participants
are not prevented from challenging a plan fiduciary's imprudent
401(k) investment choices if the investment was selected more than
six years ago. This means that there is not a one-time six year
window for challenging imprudent investment offerings.
Since we use these decisions as guides to help our clients avoid
being sued, I'll skip the procedural issues of interest to
litigators and focus on what this means for plan committees.
The rules set out by the Supreme Court are fairly simple, though
their application may not be. The Court said that the duty to
prudently select investments and the duty to monitor them are
separate. Under traditional trust law and ERISA, a
trustee/fiduciary has an ongoing duty to monitor investments and
remove imprudent ones. Fiduciary breach claims may be based
on positive action or omissions, and suit may be brought
within six years of the last act that constitutes a breach or
violation, or the last date the fiduciary could have cured an
omission, clearly extending the period for challenging failure to
remove an imprudent fund from the lineup.
The Supreme Court didn't give us guidance about how to
fulfill the duty to monitor, sending the case back to the appellate
court for further proceedings. However, some best practices
and some limits on the claims that may be brought can be deduced
from the decision and the facts.
What was the alleged violation in Tibble? The lower courts
had found that the Tibble Committee was imprudent in offering three
retail class mutual funds when lower cost institutional funds with
virtually the same investments were available. These same
claims were raised and erroneously dismissed in connection with
three older funds. The Committee met quarterly to review plan
investments and to review reports and recommendations from
investment staff, but comparing the costs of different share
classes was apparently not part of the quarterly review.
Obviously, fund costs should have been part of this review, but
if committees prepare and use a review checklist in
consultation with ERISA counsel, or have a comprehensive investment
policy drafted with the help of ERISA counsel, the likelihood of
missing major review items is minimized. Even today, we often see
investment policy statements drafted by people who are not lawyers
that focus on performance and fail to even mention the importance
of reviewing costs and fees. Having regular meetings
won't help fiduciaries if they don't focus on the right
issues when they meet. And offering the best available investment
choices to participants, and not merely avoiding imprudent ones,
should be the goal of every committee. That is the best way to
avoid investment challenges.
Although not discussed in the Supreme Court decision, in my view
it is clear that breaching fiduciaries should not have an
open-ended exposure to restore plan losses under the Tibble
rules. The Department of Labor in its amicus
brief sets forth its position that fiduciaries don't
have continuous exposure to restore losses because the losses must
have occurred within the six years preceding suit. Further,
the plaintiffs in the Tibble case did not try to claim losses for
the entire period that the retail funds were in the plan.
At the end of the day, fiduciaries who follow good practices
minimize the likelihood that they will ever have to argue that
there are specific time limits on restoring plan losses.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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