In May 2015, the Supreme Court of the United States (the “Supreme Court”) published its long-awaited opinion in Tibble v. Edison International.
The Supreme Court held that an ERISA fiduciary has a duty to continuously monitor the prudence of investment options offered under a qualified retirement plan, separate and distinct from their duty to prudently initially select investment options. While the Supreme Court’s brief opinion clearly dictates a fiduciary’s responsibility under ERISA to review investment options on a continuing basis, it did not express an opinion on the scope of such a review.
The Participants’ Claim
Participants in the Edison 401(k) Savings Plan (the “Plan”) brought a class-action lawsuit against the fiduciary of the Plan claiming a breach of ERISA’s duty of prudence related to the inclusion of six mutual funds in the Plan’s investment option lineup. All six mutual funds were higher-cost, retail class shares. The participants claimed that institutional share classes (lower fees) of the same six mutual funds were available for inclusion in the Plan. Three of the contested mutual funds were added to the Plan’s investment lineup in 1999 and three were added in 2002.
Lower Court Decisions
The District Court found that with respect to the three funds added in 2002 there was no evidence to indicate that the Plan’s fiduciary had considered the availability of lower-cost, identical mutual funds, and held that in failing to do so, the fiduciary breached its duty of prudence. However, with respect to the three mutual funds added in 1999, the District Court ruled that the participants’ claim was barred by ERISA’s 6-year statute of limitations that began running at the time funds were added to the plan in 1999. The District Court found that there were no changed circumstances that would have required the fiduciaries to reevaluate the appropriateness of offering the contested funds in the lineup, thereby restarting the statute of limitations. The participants appealed the District Court decision, and the Ninth Circuit Court of Appeals affirmed. The participants petitioned the Supreme Court for review, and the review was granted.
Supreme Court Decision
The issue before the Supreme Court was whether the retention of an allegedly imprudent investment is an action or omission that triggers the 6-year statute of limitations. The Supreme Court found that said retention would be a new trigger, and that the Ninth Circuit erred in failing to apply trust law in determining the nature of the Plan’s fiduciaries’ obligation under ERISA.
ERISA requires plan fiduciaries to act with the “care, skill, prudence and diligence” that a prudent person acting in a like capacity and familiar with such matters would use in similar circumstances. The Supreme Court noted that because ERISA is derived from trust law, it often looks to trust law to determine the contours of ERISA’s fiduciary duties. Under trust law, a trustee has a separate and distinct continuing duty to monitor investments and to remove imprudent ones. As a result, a plaintiff may allege a fiduciary breached its duty of prudence by failing to properly monitor investments and remove imprudent ones. A timely suit can be brought within six years of this failure.
The Supreme Court offered no guidance as to scope of the responsibility to continuously review investments. Instead, the case was remanded to the Ninth Circuit to determine what level of review is necessary and whether or not the Plan fiduciaries fulfilled their duties.