Compensation and Benefits Bulletin
The Supreme Court ruled May 18 that the Employee Retirement Income Security Act’s (ERISA’s) six-year statute of limitations for actions related to breaches by plan fiduciaries didn’t start to run when the fiduciaries initially offered investments. The Court reasoned that the fiduciaries had an ongoing duty to monitor the investments. The ruling is a strong reminder that plan fiduciaries are subject to fiduciary standards on an ongoing basis when they monitor (or fail to monitor) the suitability of investments over time.
The facts of the case
In the case, Glenn Tibble et al. v. Edison International et al.
, several participants in the Edison 401(k) savings plan filed a lawsuit in 2007 against Edison and others. The plaintiffs claimed that investment losses stemmed from plan fiduciaries’ expansion of the investment lineup by adding mutual funds that offered retail-class shares when identical but less-expensive institutional-class shares were available. The allegations involved three mutual funds added in 1999 and three added in 2002.
When the lawsuit was filed, the addition of the mutual funds in 2002 was within the six-year ERISA statute of limitations, but the addition of the mutual funds in 1999 was by then outside the window. The Ninth Circuit held that the participants’ claims regarding the mutual funds added in 1999 were untimely because the participants hadn’t established that a change of circumstances had occurred within six years of the filing that might obligate the fiduciaries to perform a full due diligence review of the funds.
The Ninth Circuit ruling concluded that the “mere continued offering” of a mutual fund, without other circumstances, wasn’t a new fiduciary act separate and apart from the initial decision to offer the mutual funds.
The Supreme Court overturned the Ninth Circuit, ruling instead that under applicable law a “trustee has a continuing 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.”
Based on this reasoning, the Court determined that the alleged fiduciary breach of continuing to offer the 1999 mutual funds, which occurred within the six-year period leading up to the 2007 filing of the lawsuit, wasn’t barred by the ERISA statute of limitations. The case was remanded to the Ninth Circuit for argument on the substantive merits of the participants’ lawsuit.
What to do
Many retirement plan committees tend to see the issue as the Ninth Circuit did, figuring that without some material change of circumstance, once a mutual fund has been deemed acceptable, there’s no need to revisit the decision on an ongoing basis. This case underscores that the fiduciary decision to retain mutual funds offered under a retirement plan is subject to the same standard of review as was the initial decision to offer the funds.
The Court didn’t specify how plan fiduciaries can meet this ongoing standard of care, however. Plan fiduciaries should discuss this issue with their plan advisers and consider policies and procedures to document that ongoing decisions to retain funds are well informed.
As always in the area of fiduciary prudence, follow the general principles of fiduciary responsibility:
- Establish a written investment policy.
- Adopt written policies and procedures to guide decision-making.
- Gather relevant information before decisions are made (from data and qualified advisers).
- Monitor existing investments on an ongoing basis.
- Document the overall process to establish a contemporaneous record that all plan fiduciaries performed the required due diligence and made all plan decisions solely in the best interests of the plan’s participants and beneficiaries.
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