United States: Supreme Court Rules Plan Fiduciaries Owe A Fiduciary Duty To Periodically Review Plan Investments

Last Updated: June 1 2015
Article by Darren E. Nadel and William E. Trachman

In a unanimous decision, the U.S. Supreme Court in Tibble v. Edison International held that plan fiduciaries owe an ongoing duty to review plan investments periodically to ensure compliance with their obligations under the Employee Retirement Income Security Act (ERISA).  In doing so, the Court reversed the Ninth Circuit's holding that the statute of limitations for challenges to the continued offering of an investment option begins running only at the time the investment option is selected by an ERISA plan fiduciary (absent a change in circumstances), but stopped short of defining any specific obligations apart from a "continuing duty to monitor investments and remove imprudent ones."1  The decision reinforces the importance of maintaining and documenting a formal program for review of all investment options under an individual account plan.

Factual and Procedural Background

The respondent company sponsored and maintained a 401(k) savings plan ("the Plan").  The Plan held $3.8 billion in assets for the approximately 20,000 participants in the Plan.2 In 2007, several individual participants in the Plan brought a class-action suit, alleging that the Plan's fiduciaries violated their duty of prudence under ERISA by offering numerous mutual funds as investment options, because they had high hidden fees and expenses.  Plaintiffs argued that the Plan would have been able to obtain virtually identical, but lower-priced, mutual funds.3

ERISA requires that plan fiduciaries discharge their duties

with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.4

But under a separate provision within ERISA, an action for breach of fiduciary duty must be brought within six years of:

  1. the date of the last action which constituted a part of the breach or violation, or
  2. in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation.5

In Tibble, the district court allowed the suit to proceed with respect to mutual funds that were added as investment options in 2002, since six years had not yet elapsed when the Plan participants filed their complaint in 2007.6 Then, the district court later ruled in favor of the participants on the merits, holding that the defendants "had not offered any credible explanation for offering retail-class, i.e., higher priced mutual funds that cost the Plan participants wholly unnecessary administrative fees."7 With respect to other mutual funds, however, the district court rejected the claims as time-barred, since more than six years had elapsed since those funds had been added to the Plan (as a result of collective bargaining negotiations with a union representing the company's employees).8

Both the plaintiffs and the defendants appealed to the U.S. Court of Appeals for the Ninth Circuit, which affirmed the district court's decision with respect to both the validity of the claims for the 2002 funds, and the dismissal of the claims related to the 1999 funds.  The Ninth Circuit wrote that "[c]haracterizing the mere continued offering of a plan option, without more, as a subsequent breach would render section 413(1)(A) meaningless."9 Although the panel opinion was later amended in minor ways, the essential holdings remained, and were eventually appealed to the U.S. Supreme Court.

What Duties Do Plan Fiduciaries Owe?

On several occasions, the Supreme Court has stated its view that ERISA jurisprudence is derived from the common law of trusts.  And in the Court's short eight-page opinion in Tibble, Justice Breyer faulted the Ninth Circuit for failing to adequately consider principles of trust law when it rejected the plaintiffs' claim for breach of fiduciary duty with respect to the mutual funds added in 1999.10 Not only is there a duty of "prudence" to select appropriate investment choices at the outset, but the Court held that there is a "continuing duty" to monitor those investment selections to "remove imprudent ones."11

In other contexts, the Court has rejected a "continuing violation" theory under federal statutes protecting employee rights.12 But in this context, the Court relied heavily on the fiduciary nature of the relationship between the Plan and the participants, which it repeated was based on trust principles.  On that basis, the Court held that "so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely."13 As the Ninth Circuit alluded to in its earlier opinion, the effect of such a holding on ERISA § 413(1)(A) could greatly expand the number and type of breach of fiduciary duty claims that can be pursued under ERISA § 404.  Going forward, plaintiffs will have significantly broader opportunities to assert claims based on decisions made long ago, so long as plans have failed to comply with their ongoing duties to review and monitor the investment selections contained in their plans.

What Next?

The Court's opinion does little more than remand the case for further consideration.  It offered no opinion as to the frequency with which plan administrators must review investment portfolios, or any guidance as to the level of review that administrators must undertake.

The Court's primary directive to the Ninth Circuit was simply that it should do more to "recogniz[e] the importance of analogous trust law" when evaluating the case on remand.  Given the ambiguous nature of this directive, it is difficult to determine whether the case will ultimately be resolved in favor of the plaintiffs with respect to the older offerings.  But in any event, the decision could lead to additional litigation defining the specific nature of the fiduciary duty to monitor plan investment options.

Practical Considerations

In light of the Supreme Court's ruling, many employers may wonder whether the investment options being offered under their plans are being adequately reviewed to comply with ERISA's fiduciary requirements.  Employers may therefore want to consider the following steps:

  • Assess the composition of investment review committees under ERISA plans, and the frequency of their meetings.
  • Inform investment review committees (or other fiduciaries with such responsibilities) of their obligations to carefully—and regularly—review the soundness of the investment options offered to participants.
  • Have investment fiduciaries maintain records that demonstrate their careful consideration of the available investments in company 401(k) portfolios.
  • Maintain negotiation records when involved in collective bargaining relating to investment options under the plan subject to negotiations.
  • Continue monitoring legal developments as they proceed and as case law addresses specific ongoing duties of plan fiduciaries.

Footnotes

1 Tibble v. Edison Int'l, 2015 U.S. LEXIS 3171, *12 (May 18, 2015).

2 See Tibble v. Edison Int'l, 639 F. Supp. 2d 1074, 1080 (C.D. Cal. 2009).

3 Plaintiffs brought suit under ERISA § 502(a)(2); 29 U.S.C. § 1132(a)(2).

4 ERISA § 404(a)(1)(B); 29 U.S.C. § 1104(a)(1)(B).

5 ERISA § 413(1); 29 U.S.C. § 1113(1). The ERISA statute of limitations also contains a shorter provision, requiring suit to be filed within three years after the plaintiff has actual knowledge of the violation, but this provision was not at issue in this case.

6 Tibble v. Edison Int'l, 2010 U.S. Dist. LEXIS 69119, *83-84 (C.D. Cal., Jul. 8, 2010)

7 Tibble v. Edison Int'l, 2015 U.S. LEXIS 3171, at *12 (quoting Tibble v. Edison Int'l, 2010 U.S. Dist. LEXIS 69119 at *83-84) (internal quotation marks and brackets omitted).

8 ee Tibble v. Edison Int'l, 639 F. Supp. 2d 1074, 1092 (C.D. Cal. 2009) ("[T]o the extent that these transactions occurred before August 16, 2001, Plaintiffs' claim are [sic] barred by the statute of limitations.").

9 Tibble v. Edison Int'l, 729 F.3d 1110, 1117, 1120 (9th Cir. 2013).

10 Tibble v. Edison Int'l, 2015 U.S. LEXIS 3171 at*8.

11 Id. at *10.

12 See Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618 (2007), abrogated by the Lily Ledbetter Fair Pay Act of 2009, which amended 42 U.S.C. 2000e-5.

13 Tibble v. Edison Int'l, 2015 U.S. LEXIS 3171, at *12.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions