ERISA plan fiduciaries have a continuing duty to monitor selected plan investments and to remove imprudent investment selections, according to the U.S. Supreme Court’s unanimous May 18, 2015 opinion in Tibble v. Edison International. Although the Court affirmed the fiduciary duty to monitor, it otherwise left the development of the duty’s contours to be delineated in the lower courts in future cases and rulings. A copy of the Supreme Court’s May 18 opinion can be found here.
The Supreme Court’s ruling in this important case decision have a number of implications. Among other things, it may mean an increase in claims alleging that fiduciaries imprudently retained investment selections. The ruling may also make it more difficult for defendants to have claims against them dismissed on statute of limitations grounds.
In 2007, certain beneficiaries of Edison’s 401(k) savings plan filed an action under ERISA against plan fiduciaries, alleging that the fiduciaries violated their fiduciary duties with respect to three mutual fund options added to the plan in 1999 and three others added in 2002. The claimants argued that the fiduciaries had acted imprudently by selecting the six retail-class mutual funds when lower cost institutional-class mutual funds were available.
The defendants argued that the claims regarding the 1999 selections were untimely because they had been raised more than six years after “the date of the last action which constitutes a part of the breach or omission.” The district court agreed with the defendants and dismissed the claims regarding the 1999 selections because they were included in the plan more than six years before the complaint was filed and that circumstances had not changed enough to put the defendants under an obligation to conduct a review of the mutual funds. The Ninth Circuit agreed that the claimants 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 statute of limitations period. The U.S. Supreme Court agreed to review the Ninth Circuit’s ruling.
The May 18 Decision
On May 18, 2015, in an opinion written by Justice Stephen Breyer for a unanimous court, the U.S. Supreme Court vacated the Ninth Circuit’s opinion and remanded the case to the Ninth Circuit for further proceedings. The Supreme Court said the Ninth Circuit had erred by failing to recognize that under the law of trusts, fiduciaries have a “continuing duty to monitor trust investments and to remove imprudent ones.” Further, the Court held that this duty “exists separate and apart from the trustee’s duty to exercise prudence in selecting investments.” The trustee must “systematically consider all the investments of the trust at regular intervals to ensure that they are appropriate.”
The Court went on to say that a plaintiff may allege that a fiduciary breached the duty of prudence “by failing to monitor investments and to remove imprudent ones.” As long as the alleged breach of continuing duty occurred within six years of suit, the claim is timely.
The Court did not determine whether or not the plaintiffs had sufficiently alleged a breach of the duty to monitor during the six-year limitations period to satisfy the requirements of the statue of limitations. Rather, the Court remanded the case to the Ninth Circuit to determine whether the circumstances alleged required a review of the allegedly improper investments, and if so what kind of review was required.
It seems probable that the Court’s decision in Tibble v. Edison International will encourage more claims alleging that fiduciaries improperly failed to monitor plan investments. As the Skadden law firm said of the Court’s ruling in its memo about the decision (here), “we fully anticipate an increase in claims alleging fiduciaries imprudently retained investment options, particularly where the original decision to offer the challenged investments under the plan was made more than six years before the filing of the suit.”
In any event, and at a minimum, the Court’s ruling will make it considerably harder for plan fiduciaries to establish a statute of limitations defense in breach of fiduciary duty claims based on imprudent investment options.
While there will likely be future claims based on these theories, there will also have to be a great deal of additional lower court case law development to fill in many of the issues the Supreme Court declined to address, including: what circumstances are sufficient to require plan fiduciaries to conduct a thorough due diligence review of a plan investment? How frequently must a plan fiduciary review plan investments in the absence of special circumstances requiring a more detailed due diligence review? The lower courts will also have to decide what factor are sufficient to suggest that it would be imprudent not to remove an offered investment from the plan. It can be anticipated that future lower court decisions will provide further definition to plan fiduciaries’ continuing duty to monitor.
Even thought the Court’s decision leaves a great deal to future case law development, there nonetheless are a number of important takeaways now for plan fiduciaries.
Among other things, it will be important for plan fiduciaries to consider establishing internal guidelines to document that they are regularly reviewing plan investment options and evaluating the continuing prudence of offered plan investment options. In that regard, it is important to note that the Court’s opinion stressed that trustees of investment trusts must “systematically consider all the investments of the trust at regular intervals.” The reviews then must be regular and systematic.
The Court’s comments also suggest that there is no one-size fits all type of review; rather the review must be “reasonable and appropriate to the particular investments, courses of action, and strategies involved.”
Finally, when it comes to an underperforming investment option, the Court said that the fiduciary duties include the duty to remove imprudent investments. In other words, the systemic and regular review of plan investment options should include the removal of investments that have proven to be imprudent.