Earlier in 2015, the U.S. Supreme Court clarified the ongoing duty of retirement plan fiduciaries to monitor plan investments. Tibble v. Edison International has been percolating through the federal court system since 2007. The case focuses on the timing of lawsuits against plan fiduciaries for breaches of their fiduciary duty.
In 1999, Edison’s 401(k) plan added three retail-priced mutual funds and in 2002 added three more. In 2007, plan participants sued plan fiduciaries “to recover damages for alleged losses suffered by the plan from alleged breaches of [the fiduciaries’] fiduciary duties.”
ERISA sets a six-year time limit on filing a fiduciary breach complaint. Under the law, the clock starts “the date of the last action which constitutes part of the breach or violation, or, in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation.”
Both the district court in California and the U.S. Court of Appeals for the Ninth Circuit found that the plan’s initial investments in 1999 — eight years before the initiation of the lawsuit — constituted the “last action.” They reasoned that the addition of the three funds in 2002 didn’t amount to a change in the program, so there was no call to reset the six-year limitation to that date.
U.S. Supreme Court ruling
A unanimous U.S. Supreme Court held that the Ninth Circuit had erred because it failed to consider “the contours of the alleged breach of fiduciary duty.” The nature of the fiduciary duty in this circumstance, the court held, is “derived from the common law of trusts,” which means that “a trustee has a continuing duty — separate and apart from the duty to exercise prudence in selecting investments at the outset — to monitor, and remove imprudent, trust investments.”
Thus, because the trustees’ duty was ongoing, no deadline was reached for the plaintiffs to file their lawsuit. As long as the alleged breach of the continuing duty of prudence occurs within six years of the suit, the claim falls within the statute of limitations.
The Supreme Court’s ruling didn’t address whether plan fiduciaries at Edison had failed to act as prudent fiduciaries, merely that they were still on the hook despite the interval between the time certain plan investments were made and the date that a class action suit was launched. The Court sent the case back to the Ninth Circuit to determine whether Edison’s fiduciaries shouldn’t have allowed the 401(k) plan to use mutual funds, whose fee structure was the same as that offered to “retail” (individual) investors, instead of cheaper institutionally priced funds.
Basic issue remains unresolved
The appeals court will have to consider the underlying question: Did the fiduciaries violate their duties in allowing the 401(k) plan to invest in retail-priced funds? Although the Tibble case is about plan fees, that’s only one of the many things plan fiduciaries need to consider, of course. Other critical areas of ongoing focus include:
Investment performance. Certain types of investments are volatile and positive results can never be guaranteed. But ongoing monitoring requires comparing their performance to other funds with similar investment strategies that might be doing better, even if they’re losing money. Having an independent investment expert provide regular performance monitoring and benchmarking will be important in supporting investment decisions. According to the U.S. Department of Labor, the duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. A fiduciary lacking investment expertise should hire someone with that professional knowledge to carry out investment functions. Going it alone without such expertise can lead to poor investment decisions.
ERISA Section 404(c). This provision requires plans to provide a “broad range” of investments. The range of investments must, among other things, offer at least three investment choices that are diversified and have different risk and return characteristics.
Qualified default investment alternatives (QDIAs). The QDIA rules are specific about acceptable default investments. Fiduciaries need to make sure their QDIAs maintain those characteristics over time.
Potentially bad investment choices. While meeting Section 404(c) requirements is an explicit fiduciary responsibility that plan sponsors must monitor, a conservative approach alone isn’t enough. Keep an eye on any particular fund that, if participants unwisely invested too heavily in, could get them in financial trouble.
Investment manager competence. Fiduciaries must monitor who’s managing each of the fund’s investments. Funds may periodically switch managers. When this occurs, conduct due diligence on any replacement manager.
Being a prudent fiduciary by keeping track of plan investments and operations on an ongoing basis doesn’t guarantee everything will always go according to plan. Congress understood that when it enacted ERISA, and courts will take this into consideration when considering possible violations.
At a minimum, fiduciaries must demonstrate through their actions — and, equally important, the documentation of their actions — that they gave careful thought to the plan participants’ best interest. And as the U.S. Supreme Court made clear in Tibble, fiduciaries’ duty to do so can never be put on hold.