On May 18, 2015, the Supreme Court of the United States issued its opinion in the Tibble v. Edison Int’l, 575 U.S. ___ (2015) case, finding that the U.S. Court of Appeals for the Ninth Circuit erred in applying the six-year statutory bar in the Employee Retirement Income Security Act (ERISA) to plaintiff’s claim alleging that respondents owed a continuing duty to monitor and remove imprudent investment selections. Through the decision, the Supreme Court expressly held that ERISA fiduciaries have a continuing duty to monitor plan investments and to remove imprudent investments.
In 2007, the petitioners sued Edison International and several other parties, including the fiduciaries of the Edison 401(k) Savings Plan (Plan), seeking to recover damages suffered by the Plan when the respondents added six retail mutual fund options to the Plan’s line-up of investment options in 1999 and 2002. The petitioners argued that the Plan’s fiduciaries acted imprudently by offering the six retail mutual fund options instead of virtually identical institutional-class mutual funds that charged lower administrative fees to the Plan. The applicable ERISA statute of limitations the court considered provides that no action may be commenced with respect to a fiduciary’s breach of any responsibility after the earlier of “six years after (A) the date of the last action which constituted a part of the breach of violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation.”
The district court agreed with the petitioners’ argument with respect to the three funds that were added in 2002 but determined that the claim as applied to those funds added in 1999 was untimely because they were selected more than six years before the complaint was filed. The district court agreed to consider the petitioners’ argument that the complaint was nevertheless timely because the 1999 funds underwent significant changes within the six-year statutory period that should have prompted a comprehensive diligence review. The district court concluded that the funds’ circumstances had not sufficiently changed to place the respondents under an obligation to conduct a full-scale review. The Ninth Circuit affirmed the district court’s decision holding that the petitioners’ claim as to the funds added in 1999 was untimely because petitioners had not established a change in circumstances that might trigger an obligation to review and to change investments within the six-year statutory period.
The Supreme Court unanimously held that the Ninth Circuit erred in failing to consider the role of the fiduciary’s duty of prudence under trust law when it rejected the petitioners’ claim as untimely. The Supreme Court also determined that the Ninth Circuit’s decision failed to recognize that under trust law a fiduciary is required to conduct a regular review of its investments, with the nature and timing of the review contingent on the circumstances.
The opinion extensively cites trust law in support of its position that an ERISA fiduciary has a continuing duty to monitor plan investments and remove imprudent ones. The Supreme Court concluded that the district court and Ninth Circuit applied the six-year statutory bar based solely on the Plan’s initial selection of the funds without considering the continuing duty to monitor its investments. Accordingly, the Supreme Court held that as long as the alleged breach of fiduciary duty—meaning the failure to monitor investments—occurs within six years of the suit’s commencement, the claim is timely.
The Supreme Court’s holding makes clear that ERISA fiduciaries have a continuing duty to regularly monitor a plan’s investment options and to remove imprudent ones. Notably, the Supreme Court refused to provide any guidance on the factors underlying this continuing duty to monitor, and left the development of the law on that issue to the lower federal courts. The Supreme Court even refused to hold that respondents had done anything wrong, noting that after the Ninth Circuit takes another look at the issue, “it is possible that it will conclude that respondents did indeed conduct the sort of review that a prudent fiduciary would have conducted absent a significant change in circumstances.” Interestingly, both petitioner and respondent were in agreement that the Ninth Circuit had erred and that the duty of prudence involves a continuing duty to monitor investments and remove imprudent ones. The parties merely disagreed with regard to the scope of that responsibility. However, the Supreme Court chose not to answer that important question.
The Supreme Court’s silence on the legal framework for duty to monitor claims will have significant effects on participants, employers and plan fiduciaries. For participants, this decision will likely result in increased litigation related to the question of what the duty to monitor really means, in terms of both timing (annual or quarterly reviews of investments) and substance of the reviews. This decision should prompt employers to ensure they have the benchmarks and processes in place to document their continuous monitoring of investments and administrative fees going forward in an effort to satisfy their fiduciary duties and avoid litigation.