A decision issued last week by the Supreme Court of the United States (SCOTUS) has significant implications for both ERISA plan fiduciaries and plan participants.
In Tibble v. Edison, SCOTUS held that, in addition to the duty to exercise reasonable prudence in the initial selection of investments, ERISA fiduciaries also have a continuing duty to monitor the prudence of plan investments, and to remove and replace imprudent investments. No. 13-550, 2015 U.S. LEXIS 3171 (U.S. May 18, 2015).
In that case, the plaintiffs, on behalf of current and former 401(k) plan beneficiaries, claimed that Edison (the plan fiduciary, and a holding company for various electric utilities and other energy interests) violated ERISA’s duty of prudence by offering higher-cost, retail-class mutual funds to plan participants, even though identical lower-cost, institution-class mutual funds were available.
The 9th Circuit barred plaintiffs’ claims (filed in 2007) related to funds added to the plan in 1999, and held that absent a significant change in circumstances giving rise to a duty to conduct a full diligence review of existing funds, ERISA’s 6-year statute of limitations was triggered when the investments at issue were added to the plan. According to the 9th Circuit, a contrary view could expose fiduciaries to liability for a protracted and indefinite period.
SCOTUS vacated and remanded the 9th Circuit decision and held that plan sponsors must continuously monitor investment choices and fee structures, even in the absence of significant changes in circumstances. SCOTUS compared the plan sponsor’s fiduciary duty to that of a trustee under trust law and explained that a fiduciary must discharge his responsibilities “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use. The case was remanded to the 9th Circuit for a decision regarding the scope of that responsibility, recognizing the importance of analogous trust law. Id. at *9.
While the decision sets forth the requirement that fiduciaries have an obligation to continuously monitor investment choices, it leaves open the questions of when and under what circumstances an ERISA plan fiduciary will violate that continuing duty.
We can assume courts will place more scrutiny on how and how often fiduciaries monitor investment choices and what standards they apply when deciding to make an investment change. Courts may look to the particular states’ Uniform Prudent Investor Act and/or Uniform Principal and Income Act as guidance with regard to the applicable standard of prudence. For that reason, Courts will also be more inclined to allow breach of fiduciary duty claims against plan fiduciaries to move into discovery to discern whether the duty has been properly discharged.
In the wake of the decision, retirement plan sponsors should monitor third party investment managers, review plan expenses on a regular basis, document such reviews and make changes to investment choices, if necessary; keeping in mind that portfolios must be properly allocated and low fees do not always translate to higher returns.
PLDO will be keeping an eye on the 9th Circuit proceedings to see how the Court applies the continuing duty standard and what guidance it may offer to plan sponsors and participants. If you have questions about this case or ERISA, please call Attorneys William O’Gara or Jillian Jagling at 401-824-5100 or email [email protected] We welcome your comments, questions and suggestions.