As a result of the U.S. Supreme Court's decision in Tibble v. Edison Int'l, it will now be easier for participants in 401(k) and other participant-directed plans to bring lawsuits challenging investment options added to the plan more than six years before a lawsuit was filed. In a unanimous decision, the Supreme Court rejected the view recently adopted by three federal appellate courts, which had held lawsuits challenging plan fees to be untimely under the six-year statute of limitations under the Employee Retirement Income Security Act (ERISA). Based on the decision, several action steps are recommended at the end of this article.
Factual Background
In 2007, participants in the Edison 401(k) Savings Plan (Plan) sued Plan fiduciaries and others to recover damages for alleged losses suffered by alleged breaches of fiduciary duties. The participants argued that the fiduciaries violated their duties with respect to three mutual funds added to the Plan in 1999 and three more mutual funds added to the Plan in 2002. They argued that the fiduciaries acted imprudently by offering six higher priced retail-class mutual funds as Plan investments when materially identical lower priced institutional-class mutual funds were available.
Procedural Background
Because ERISA requires a breach of fiduciary duty claim 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," the district court held that the petitioners' complaint as to the 1999 funds was untimely because the investments were included in the Plan more than six years before the complaint was filed, and the circumstances had not changed "significantly" within the six-year statutory period to place the fiduciaries under an obligation to review the mutual funds and to convert them to lower priced institutional-class funds. The Court of Appeals for the Ninth Circuit affirmed, concluding that the participants had not established a "change in circumstances" that would trigger an obligation to conduct a "full due diligence review" of the 1999 funds within the six-year statutory period.
Decision on Statute of Limitations
The Supreme Court held that the Ninth Circuit was wrong to apply the statutory bar to a breach of fiduciary duty claim based on the initial selection of the investments. It noted that ERISA's fiduciary duty is "derived from the common law of trusts," which provides a continuing duty 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—regardless of any "significant change" or "change in circumstances."
Fiduciary Standard for Review of Funds
In the opinion, the Supreme Court expresses no view on the scope of the fiduciaries' duty in this case. For example, the Supreme Court did not decide whether a review of the contested mutual funds is required, and, if so, what kind of review is required. Is it a "full due diligence review" or something else?
Despite the focus on the statute of limitations question, the broader issue is the extent to which plan fiduciaries have an ongoing duty to monitor plan investments and other aspects of plan administration. While the ongoing duty to monitor is not an issue for plan fiduciaries per se, the larger issue is what precisely that duty involves.
Action Steps
In light of the Supreme Court's decision, plan fiduciaries should consider:
- Whether the investment options offered under the plan could be offered at a lower share class with a lower expense ratio;
- The advisability of undertaking a periodic "full due diligence review" of funds that have been selected for the plan; and
- Although not dispositive on the statute of limitations issue, taking into consideration any "significant changes" or "changes in circumstance" that would warrant changing an investment option.
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.
