THE STATUTE OF LIMITATIONS ROLLS ON FOR ERISA FIDUCIARIES’ DUTY TO MONITOR
On May 18, 2015, the U.S. Supreme Court in Tibble, et al. v. Edison International et al, unanimously held that there is a continuing duty under ERISA for fiduciaries to monitor and remove imprudent investments. With this ruling, the Supreme Court vacated a 9th Circuit case which had held that, under ERISA’s 6-year statute of limitations, a claim alleging a breach of fiduciary duty concerning a plan investment initially selected outside the 6-year statutory period could only be brought if there was a change in circumstances which would trigger a fiduciary to re-examine the fund’s inclusion in the plan. The Supreme Court ruling also – in effect – reversed similar prior rulings in the 4th and 11th Circuits. Essentially, for all intents and purposes going forward, the Supreme Court ruling in Tibble provides for a rolling 6-year fiduciary liability window for a violation of the continuing duty to monitor investments.
The Tibble dispute began in 2007 when beneficiaries of the Edison International 401(k) Savings Plan filed a lawsuit on behalf of the Plan seeking – among other things – to recover damages for alleged losses suffered by the Plan on account of claimed breaches of fiduciary duty. Specifically, the beneficiaries argued that the Plan fiduciaries breached their duties with regard to three mutual funds added to the Plan in 1999 and three mutual funds added to the Plan in 2002. The beneficiaries argued that the Plan fiduciaries acted imprudently by offering six higher priced mutual funds as Plan investments when materially identical lower priced mutual funds were available. The District Court presiding over the case agreed with regard to the mutual funds added in 2002, holding that the Plan fiduciaries had “not offered any credible explanation” and that the Plan fiduciaries had failed to exercise “the care, skill, prudence and diligence under the circumstances” which ERISA demands.
However, the District Court also held that the beneficiaries’ claims with regard to the funds added in 1999 were untimely. It believed that the beneficiaries had not met their burden of showing that a prudent fiduciary would have undertaken a full due-diligence review as a result of alleged changed circumstances which might have triggered an obligation to review the investments within the 6-year statutory period. The 9th Circuit affirmed.
The Supreme Court held that the 9th Circuit “erred by applying a statutory bar to a claim of a ‘breach or violation’ of a fiduciary duty without considering the nature of the fiduciary duty.” According to the Supreme Court, the 9th Circuit failed to recognize that, under trust law, a fiduciary has a duty to conduct a regular review and to monitor the plan investments. The Supreme Court stated that “[t]his continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”
While the Supreme Court overturned the bar which the 9th Circuit attempted to establish and felt that the claim was timely so long as the alleged breach of the continuing duty occurred within six years prior to the suit being advanced, it expressly declined to provide any definitive guidance on the requirements and scope of the duty to monitor under the particular facts and circumstances, and sent the case back to the 9th Circuit to apply the proper standard.
Practically, the take-away of this case is pretty simple: ERISA fiduciaries must have a process in place to monitor and review a plan’s investments on an ongoing basis. Many fiduciaries commonly do that already. However, for those who do not (or who are not as diligent about it as they should be), know that trying to use the statute of limitations to justify a lack of continuing prudent investment behavior is now a very risky proposition.