This week’s decision by the United States Supreme Court in Tibble v. Edison International, 2015 U.S. LEXIS 3171 (May 18, 2015), is expected to trigger an increase in lawsuits against 401(k) plan fiduciaries.
The Tribble case was filed in 2007 as a class action by the beneficiaries of the Edison 401(k) retirement plan, on behalf of the plan and its beneficiaries, against Edison and the plan fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) for breach of fiduciary duty. The plaintiffs alleged that the defendants breached their fiduciary duties by offering certain retail-class mutual funds instead of other institutional-class mutual funds that had lower administrative costs. The plaintiffs sought damages for the losses sustained by the plan as a result of the higher cost of the mutual funds. Three of the mutual funds in question had been added to the 401(k) plan in 1999 and three had been added in 2002.
The district court for the Central District of California ruled in favor of the plaintiffs on the three 2002 funds, finding that the defendants breached their fiduciary duties by selecting retail-class mutual funds instead of institutional-class mutual funds. However, with respect to the three 1999 funds, the district court held that the plaintiffs’ claims were barred by the six-year statute of limitations under ERISA, as those funds had been added 1999, more than six years before the complaint was filed in 2007.
The plaintiffs argued that their claims as to the three 1999 mutual funds were not barred because the funds had undergone significant changes during the six-year period. According to the plaintiffs, these changed circumstances should have caused the plan fiduciaries to perform a full due diligence review of the three funds and to switch the funds to institutional-class mutual funds. The district court found that changed circumstances were not sufficient to create such a duty on the part of the fiduciaries. On appeal, the Ninth Circuit Court of Appeals affirmed the district court’s decision.
In a rare unanimous decision, the United States Supreme Court reversed the Ninth Circuit. The Court explained that ERISA provides that a claim of breach of fiduciary duty must be filed within six years of the earlier of: (1) the date of the last act of the breach, or (2) with respect to an omission, the last date the fiduciary could have cured the breach. 29 U.S.C. §1113.
The Court held that the Ninth Circuit had erred in relying on the date when the fiduciaries had added the three retail-class mutual funds to the 401(k) plan as the triggering event for statute of limitations purposes. The Court emphasized that a fiduciary of an ERISA plan owes the beneficiaries the highest fiduciary duty under trust law. The fiduciary must act with “the care, skill, prudence, and diligence” of a prudent person “acting in like capacity and familiar with such matters.” 29 U.S.C. §1104(a)(1). Under trust law, a fiduciary must perform a regular review of the investment, taking into consideration the circumstances and any significant changes in the circumstances.
The Court stated:
“Under trust law, a trustee has a continued duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”
Thus, the Court held that a fiduciary’s duty extends beyond the initial investment decision, and includes reviewing and monitoring the investment as long as the investment remains in the plan. The Court emphasized that the duty is continuing:
“A plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones. In such a case, so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely.”
The Court found that the Ninth Circuit had incorrectly applied the six-year statute of limitations solely to the initial selection of the three mutual funds in 1999 “without considering the contours of the alleged breach of fiduciary duty.” The Court vacated the Ninth Circuit’s decision and remanded the case for further proceedings.
Although 401(k) plan fiduciaries may well have had the obligation to continuously review, monitor, and evaluate the plan investments before Tribble, after this decision that obligation is clear and it encompasses the duty to take action to change the investments if circumstances change. Consumer advocates view the case as very favorable for employees and retirees and expect that it will trigger more litigation against plan fiduciaries. Also expected is a greater choice of lower-cost mutual funds that will become available for 401(k) plans.