Section 409 of ERISA imposes personal liability on a plan fiduciary to make good to the plan any losses resulting from the fiduciary’s breach of any duties
imposed by Title I of that statute. Section 413 provides generally that no action for breach of fiduciary duty may be brought after the earlier of:
- six years after
- the date of the last action which constituted a part of the breach, or
- in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation; or
- three years after the earliest date on which the plaintiff had actual knowledge of the breach.
A 2013 decision of Ninth Circuit Court of Appeals dismissed Section 409 claims against the fiduciaries of a 401(k) plan as to various allegedly imprudent
mutual funds that were included as plan investment options more than six years before suit was filed. Holding that the fiduciaries had a continuing duty to
monitor participants’ investment options and to remove imprudent ones, the U.S. Supreme Court yesterday vacated that decision. Tibble v. Edison Int’l, 2015 U.S. LEXIS 3171 (U.S. May 18, 2015).
The Supreme Court’s Tibble Decision
Plaintiffs in Tibble are participants in their employer’s participant-directed 401(k) plan. They filed suit in 2007, claiming that plan fiduciaries
had an ongoing duty to monitor 401(k) investment options and, as part of that monitoring process, should have discovered that the plan could have offered
lower-cost institutional mutual fund shares instead of the more expensive options that had been selected.
The Ninth Circuit had affirmed dismissal of the breach-of-fiduciary-duty claims as to mutual funds included as investment options prior to the six-year
period preceding plaintiffs’ lawsuit, because plaintiffs failed to allege any change of circumstances triggering a duty by fiduciaries to review and change
investments within that period.
In a unanimous opinion authored by Justice Breyer, the Supreme Court held that ERISA’s fiduciary duty, derived from the law of trusts, imposes a continuing
duty to monitor plan investments and remove imprudent ones. Accordingly, so long as a plaintiff alleges a breach of this continuing fiduciary duty during
the six-year period before suit, the claim would be timely.
Justice Breyer did not spell out what was required in the duty to monitor, other than the requirement in ERISA Section 404(a)(1) that the
fiduciary discharge his or her duties “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with
such matters” would use.
The Supreme Court remanded the case to the Ninth Circuit for consideration of whether a breach of the continuing fiduciary duty to monitor had been
properly alleged. Analogous trust law, said the Court, would be important in determining the contours of this fiduciary duty.
The decision was no surprise after the oral argument in the case, in which all parties agreed on the following:
There is no “continuing violation” as to a fiduciary decision to offer an imprudent investment as an investment option. The ERISA statute of
limitations begins to run from the date of the alleged fiduciary breach in making that decision.
There is an ongoing fiduciary duty to monitor investment options prudently.
The process of “monitoring” investments is less intensive and rigorous than the process of initial selection of investment options.
The decision in Tibble is likely to result in increased litigation over fiduciaries’ investment-monitoring responsibilities, not only as to
fees charged by fund managers but also regarding other matters affecting the prudence of investment choices. Here are some suggestions to help minimize the
chances that fiduciaries’ investment choices would be legally challenged:
- Plan fiduciaries should carefully document their evaluation and negotiation of fees and overall investigation concerning the selection of 401(k) plan
investment options. This is especially important when funds with higher fees are under consideration. To determine whether a fund’s management fees are
reasonable, fiduciaries should obtain a survey of fees charged by comparable funds as part of the selection process.
- Fiduciaries must be diligent in undertaking periodic monitoring of all plan investments. In addition to normal investment-monitoring processes, changes
in a fund’s name, ownership or management should prompt a more detailed due diligence review of the fund. Monitoring activities also should be documented.
- Sponsors of large plans, as well as the fiduciaries of those plans, should use their bargaining power to negotiate lower management fees.
- Relying on recommendations of independent investment advisors without further investigation may not meet the fiduciary standard of prudence. Plan
fiduciaries must make certain that their reliance on advisors’ advice is reasonably justified.
- Although fees are important, they are only one part of the analysis of the appropriateness of a fund. ERISA does not require fiduciaries to select the
least-expensive fund available; rather, they must select funds in accordance with ERISA’s prudence standard, which places great emphasis on process and
Fiduciary responsibilities surrounding retirement plan fees also will continue to be an area of regulatory activity.
For further information, please contact any of the authors of this article − James P. McElligott Jr., Katie M. Rak and Larry R. Goldstein − or any other member of the McGuireWoods employee benefits team.