United States: Tibble v. Edison International: A Plan Fiduciary's Failure To Monitor Plan Investments On A Continuing Basis May Lead To Liability

Recently, the Supreme Court issued its highly-anticipated decision in Tibble v. Edison International.1  The Court's holding reiterates that the scope of a plan fiduciary's obligations includes not only the duty to prudently select the investment funds made available to participants in an ERISA-covered plan but also the duty to monitor such funds on an ongoing basis.  

Key Takeaways for Plan Fiduciaries

Under ERISA, retirement plan fiduciaries have an obligation to prudently select plan investments and authorize the plan to pay only reasonable expenses.  Plan expenses have been the subject of a lot of attention as more participants challenge the fee arrangements of the investment options under their plans.  The Tibble case highlights that plan fiduciaries must not only select prudent investments with reasonable fee arrangements at the outset, but also regularly monitor the investments to ensure that their fee structures are reasonable.  While the case addresses fee arrangements, fiduciaries should note that all aspects of investment funds must be monitored on an ongoing basis.    

Background of the Case

In 2007, several participants and beneficiaries (the "Petitioners") of the Edison 401(k) Savings Plan (the "Plan") filed suit against the Plan's fiduciaries alleging a breach of fiduciary duty under ERISA.  They claimed that the Plan fiduciaries violated their duty of prudence by selecting several "retail" class mutual funds with high expenses and fees as designated plan investments — three of which were added in 1999 and three in 2001.  The Petitioners asserted that it was imprudent to designate these funds as Plan investments, because "institutional" class mutual funds offering a nearly identical array of investments with lower fees and expenses were available to the Plan.

The District Court agreed that the Plan fiduciaries acted imprudently in 2001 by selecting these investments for the Plan.  It concluded, however, that the Petitioners' claim as to the 1999 selection of funds was barred by the statute of limitations: the earlier of six years after (i) the date of the last action constituting a breach or violation, or (ii) in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation.  Since the fiduciaries selected the first three retail funds for the Plan nearly eight years before the Petitioners filed their claim, the District Court found that claims relating to the selection of the funds were barred by the statute of limitations and therefore beyond the scope of its review. 

The District Court allowed the Petitioners to argue that, despite the 1999 selection of the three mutual funds, their complaint was nevertheless timely because these funds underwent significant changes within the 6-year statutory period that should have prompted respondents to undertake a full due-diligence review and convert the higher priced retail-class mutual funds to lower priced institutional-class mutual funds.  The District Court concluded, however, that petitioners had not met their burden of showing that a prudent fidu­ciary would have undertaken a full due-diligence review of these funds as a result of the alleged changed circum­stances.  

On appeal, the United States Court of Appeals for the Ninth Circuit upheld the District Court's decision as to all six funds.  It found that with respect to the funds selected in 1999, the last act constituting a potential breach of fiduciary duty — the selection and designation of the retail funds as a Plan investment — occurred more than six years before the action was filed.  The Ninth Circuit had rejected the proposition that the mere continued offering of the funds as a plan investment, without more, could constitute an additional breach of fiduciary duty.  Rather, it concluded that only a significant change in circumstances, one that would require a "full due diligence review" of the funds, could be a subsequent breach, lest plan fiduciaries be held liable for decisions made decades before.  With respect to the three mutual funds added in 1999, the Ninth Circuit held that petitioners' claims were untimely because peti­tioners had not established a change in circumstances that might trigger an obligation to review and change in­vestments within the 6-year statutory period.

The Supreme Court's Decision

On review, the Supreme Court overturned the Ninth Circuit, finding that it failed to adequately consider the trust law duty to monitor the investments of a trust and remove imprudent investments.  Since ERISA is "derived from the common law of trusts," the Court found that ERISA fiduciaries also have a continuing duty to monitor the suitability and prudence of an ERISA plan's investments.  The Court explained that this obligation is "separate and apart from the trustee's duty to exercise prudence in selecting investments at the outset."  Based on this continuing duty, the Court held, a fiduciary breach claim is timely provided that a plaintiff's claim alleging breach of the continuing duty of prudence occurred within six years of the suit.  The Court did not discuss the scope of a fiduciary's duty to monitor plan investments, e.g. the frequency with which fiduciaries must monitor investments.

The Implications of this Case

The Tibble decision shows that plan fiduciaries may not escape liability for claims arising out of their failure to change an investment fund even if the selection of the fund occurred more than six years before the suit is brought.  Although the selection of an investment would generally be insulated from claims of fiduciary breach after six years, the failure to monitor and remove an investment once selected would still be exposed to claims for six years from the date of the failure.  To mitigate this risk, plan fiduciaries should periodically review the suitability of a plan's investments and the related fees and document the same.

Footnotes

1 Tibble v. Edison International, No. 13-550, 575 U.S. __ (2015).

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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Authors
Gregory C. Matisoff
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