The unanimous decision handed down by the Supreme Court in Tibble vs. Edison International has made clear plan sponsors have an ongoing fiduciary duty to monitor the investments in 401(k) plans.
Citing the fundamentals of trust law, which the court said ERISA’s fiduciary duty is derived from, the decision laid to rest the question of whether or not sponsors are liable for imprudent investments implemented in a plan more than six years before a claim is brought.
“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,” wrote Justice Stephen Breyer, who delivered the opinion for the court.
The 9th Circuit Court of Appeals had ruled that three retail-class mutual funds Edison added to its investment menu in 1999 did not constitute a fiduciary breach, even though cheaper institutional-class options were available.
In doing so, the 9th Circuit interpreted ERISA’s six-year statute of limitation to begin from the time an investment is first implemented in a plan.
But in overturning the lower court, the Supreme Court said, “the 9th Circuit did not recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.”
The ruling could not have been clearer in confirming sponsors’ fiduciary obligation to monitor their plans.
But the justices stopped short of establishing just what that monitoring process should look like, and whether or not Edison’s monitoring processes failed ERISA’s fiduciary standard.
In remanding the case, those questions have been sent back to the 9th Circuit.
Just what this all means for sponsors is subject to some debate. Here is some reaction from leading ERISA attorneys around the country:
Jerry Schlichter, Schlichter, Bogard and Denton, lead attorney for plaintiffs
“On behalf of Edison employees and all Americans who rely on 401(k)s for their retirement, we are very pleased with this historic and landmark, unanimous decision by the Supreme Court. Going forward, this decision will be of great significance for American workers and retirees for generations to come.”
Marcia Wagner, The Wagner Law Group
“That the Supreme Court has decided Tibble on the narrowest possible grounds should not be surprising, since this was essentially the position advocated by the U.S. Solicitor General during oral argument. Jumping ahead, there is at least a possibility that the Ninth Circuit could take a similar approach by deciding the case on procedural grounds. As directed by the Supreme Court, the lower court will also consider the defendant’s argument that the plaintiffs had failed to raise the argument that the failure to monitor was a new breach before they got to the Supreme Court. Thus, it is possible, albeit somewhat unlikely, that there may never be guidance from Tibble on the scope of the duty to monitor.”
Greg Porter, Bailey Glasser
“I think the plaintiffs get a new trial on the funds that were selected outside the six-year period. For such funds, the first trial was limited to presenting evidence on materially changed circumstances that would trigger a full due diligence review equal to initial selection. The plaintiffs failed to put on sufficient evidence of material changed circumstances.
“But now the plaintiffs get to prove (1) the appropriate standard of care for monitoring, and (2) that the plan fiduciaries breached that standard of care. Thus, for example, if ordinary course monitoring would have revealed that the fees were unreasonably high, and the fiduciaries failed to engage in ordinary course monitoring, they are liable for the excessive fees.”
Russell Hirschhorn, Proskauer
“While some have already opined that the Court’s decision has paved the way for increased fee litigation, that is not necessarily the case. It will not be enough to simply plead that defendants failed, within six years of filing suit, to prudently monitor an investment option. Rather, as the Supreme Court articulated many years ago, a plaintiff must be able to plead a plausible claim.”
Mark Blocker, Sidley Austin
“Whether this decision will have a substantial impact remains unclear. Virtually all large employers already conduct periodic reviews of the investment options in the 401(k) plans they sponsor, so the decision will not require any major new activities on their part. What remains to be seen is how the duty to monitor will be interpreted, a question that was not answered by the Court and was left to the lower courts to determine.”
John Donovan, Ropes and Gray
“The biggest news from today’s opinion is that the Court refrained from saying what the duty to monitor requires of plan fiduciaries. The scope of that duty will be determined on a fact-specific case-by-case basis by lower courts, who will be looking at factors such as the frequency of the ongoing review, how rigorous that review is, and what records managers have maintained to document that they have satisfied their duty to monitor.”
Thomas Clark, The Wagner Law Group
“This is obviously a significant victory for the plaintiffs in this case and plan participant lawsuits generally, as many lawsuits in the last five years had been dismissed citing the overly restrictive interpretation of ERISA’s six-year statute of limitations.
“There is no longer any dispute that a fiduciary must have a process to monitor a plan’s investments. We think it is also fair to say that this duty to monitor extends to all other areas of plan administration and responsibility (e.g. fees paid to providers, quality of providers, whether services are necessary, etc.)”
Jesse Gelsomini, Haynes and Boone
“Employers should amend the investment policy statement to provide for a comprehensive review of each investment alternative at least annually, and more frequently if the responsible plan fiduciary determines that doing so would be prudent under ERISA’s fiduciary standards.”