6 August 2015
In May the U.S. Supreme Court issued its decision in Tibble v. Edison International, ruling that when a plaintiff brings a claim under the Employee Retirement Income Security Act (ERISA) for an alleged failure to monitor plan investments and remove imprudent ones, the limitation clock starts running at the time of the alleged monitoring failure. Despite the reactions of some commentators, this ruling does little to alter the obligations of sophisticated employers that engage in the routine monitoring the Court contemplated.
The specific dispute in Tibble involved a number of mutual funds offered as investment options under Edison’s 401(k) plan. A group of plan beneficiaries filed suit alleging that Edison had breached its fiduciary duty of prudence by offering retail-class mutual funds to its employees, when materially identical institutional-class funds—with lower fees—were available. ERISA includes a six-year outside time limit for claims of breach of fiduciary duty, and three of the mutual funds had been added to the plan more than six years prior to the filing of the lawsuit. The district court therefore concluded—and the U.S. Court of Appeals for the Ninth Circuit affirmed—that without a showing of changed circumstances constituting a new breach of duty within the limitations period, the plaintiffs’ claims regarding the three mutual funds were untimely.
The Supreme Court disagreed. In a unanimous opinion authored by Justice Stephen Breyer, the Court began by noting that fiduciary duties under ERISA are drawn from common-law trust doctrine. And since the common law of trusts imposes a continuing duty to monitor trust investments and remove those that are imprudent, the Court reasoned that ERISA should be understood to require something similar. That is, the Supreme Court held that an ERISA fiduciary can breach its duty of prudence not only by initially selecting bad investments, but also by failing to monitor existing investments and removing imprudent ones from the plan.
Notably, the Court declined to define the precise contours of this duty. It did not decide whether the duty to monitor required Edison to review the mutual funds at issue in the case—or what any potential review might look like—instead leaving those questions for the Ninth Circuit on remand. In short, the Court’s holding in Tibble was simply that ERISA fiduciaries have some level of ongoing duty to monitor the appropriateness of their plans’ investments, separate from the duty to prudently select investments in the first place.
That obligation will be no surprise to sophisticated employers, so Tibble’s practical effects are likely to be minimal. That said, the Tibble decision may lead to an increase in litigation as plaintiffs seize on and test the scope of the duty to monitor. It is therefore important that businesses with ERISA-covered retirement plans take the right steps to minimize their exposure:
- First, employers should ensure that they have established procedures in place for prudent fiduciary decision-making. After Tibble, it is clear that these should include processes for periodically and systematically reviewing all plan investments—not only those with changed circumstances—to confirm that the investments remain prudent. Employers that find themselves without such processes—and those that suspect their current processes may be deficient—should look to industry best practices for guidance. Particular attention should be paid to selecting appropriate benchmarks for performance and fees, and thoroughly evaluating any recommendations of plan advisors.
- Second, employers should arrange for detailed documentation of these decision-making processes and their results. This means both that the procedures themselves be memorialized, and that fiduciaries record the actions they take and the outcomes they reach when conducting reviews and making investment decisions. Adequate documentation of process is critical to effectively rebutting claims that a fiduciary breached a duty of prudence.
- Finally, employers with ERISA-covered plans are strongly advised to follow up and make sure that their existing or new review procedures actually are being observed. As is perhaps obvious, having instituted a decision-making process will be of limited assistance in potential litigation if that process exists only on paper.
Covered employers that follow these steps—the same steps that were advisable before the Tibble decision—have little to worry about from the Supreme Court’s recent ruling. The Court’s announcement that ERISA fiduciaries have an ongoing duty to prudently monitor their investments is not a major change in the law, and should be nothing new to sophisticated employers. As before Tibble, firms are advised to protect themselves from breach-of-duty claims by adopting and following well-documented processes for prudent fiduciary decision-making and investment review.
Reprinted with permission from the August 6, 2015 edition of Corporate Counsel © 2015 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.