In a much-anticipated decision, the U.S. Supreme Court unanimously ruled to overturn the 9th Circuit Court of Appeals and support plan participants who sued their employer for breach of fiduciary duty (Tibble v. Edison Int’l (U.S. 2015). Edison International 401(k) plan (the Plan) participants formed a class and sued their employer for violating the fiduciary duty to monitor the investment funds offered under the Plan. Some claim this decision will make it easier for employee participants to sue their employer plan fiduciaries.
By way of background, most defined-contribution plans provide a menu of investment options from which participants select to invest their savings. The participants make the actual decision from among those offered. Ideally, the only funds offered are those that the plan fiduciaries identified as the best, most prudent, and appropriate. This important fiduciary responsibility has been in place forever (well, maybe not that long). So what happened in this case?
A group of 401(k) participants discovered three of the investment funds offered within the Plan were essentially identical to other retail funds that charged significantly lower fees. They suggested that by replacing the funds with comparable, less-expensive options, the participants could enjoy greater investment returns. The employer, however, chose to keep the funds as they were.
Finally, in 2007, the participants filed suit in federal district court, claiming the fiduciaries breached their duty to monitor the fees of three retail-class mutual funds. The court agreed with the participants. But on appeal, the 9th Circuit ruled that ERISA’s six-year Statute of Limitations (SOL) protected the Plan fiduciaries from liability. The three funds in question had been selected more than eight years earlier and so were beyond the SOL. Nevertheless, the U.S. Supreme Court decided that the SOL did not, in fact, protect the fiduciaries, but that the fiduciaries had an ongoing duty to review the appropriateness of fund performance, which includes comparing fees.
The lesson here is that plan fiduciaries must monitor each investment option offered and restrict or remove those that are no longer the most prudent available. Justice Breyer, who wrote the unanimous decision for the Court, offers employer plan sponsors some instructive language concerning fiduciary responsibilities. Plan fiduciaries must “systematically consider all the investments of the trust at regular intervals” to ensure appropriateness. Breyer added that this duty “includes removing imprudent investment options from the plan. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”
The Court sent this case back to the 9th Circuit to reconsider its ruling in light of the Court’s instruction regarding the fiduciary duty to continually monitor fund appropriateness.