ERISA suit challenging failure to remove proprietary investment funds time-barred

A breach of fiduciary duty suit brought later than six years after the initial selection of allegedly improper proprietary investment funds was time-barred, according to the U.S. Court of Appeals in Atlanta (CA-11), because no intervening events occurred that would qualify the fiduciaries’ failure to remedy the breach as a separate cognizable ERISA violation.

Proprietary mutual funds

A bank sponsored a 401(k) plan that provided plan participants with various investment vehicles in which to invest their individual account assets. Among the investment options selected by the bank’s plan committee, were proprietary mutual funds of the bank. The funds were offered and managed by subsidiaries of the bank and the subsidiaries received as revenue all of the funds’ management fees.
An employee who had invested in three of the funds terminated employment at the bank, receiving a full distribution of her account balance in October 2005. However, in March 2011, the employee filed a class action suit alleging ERISA violations by the bank and members of the plan committee. Primarily, the employee alleged that the fiduciaries acted in their own financial interest and not that of the plan participants by: (1) selecting the proprietary funds and (2) then repeatedly failing to remove or replace the funds, despite their poor performance and high fees relative to unaffiliated investment vehicles.

The fiduciaries moved to dismiss the complaint, maintaining that the employee’s claims were not brought (as required by ERISA §413(a)(1)) within the earlier of: (1) six years of the date of the last action constituting the fiduciary breach or violation, or (2) three years from the date on which the employee had actual knowledge of the excessive fees and poor performance of the proprietary funds. In support of the motion to dismiss, the fiduciaries submitted documents, such as the plan document, summary plan description, Quarterly Investment Performance (QIP) Booklet, and plan prospectus, that provided detailed descriptions of each fund, including the goals, risks, performance, and fees of each fund. However, no evidence was submitted establishing that the fiduciaries had sent the documents to the employee or that she had ever received any of them.
The trial court found that the employee had actual knowledge of her claims in 2005. However, because the employee had cashed out her account, her claim was time-barred under the applicable three-year statute of limitations.

On appeal, the employee challenged the trial court’s application of the three-year statute of limitations. The fiduciaries maintained that, even if the three-year limitations period was not applicable, the employee’s claim was time-barred by the six-year limitations period.

Three-year limitations period

Initially, the appeals court ruled that the employee did not have actual knowledge of the fiduciary breach alleged in her claim. The fiduciaries did not establish that the documents, ostensibly proffered to suggest knowledge of the investment option risks were actually furnished to the employee or that she obtained knowledge of the information in the documents from another source. Accordingly, the trial court erroneously applied the three-year limitations period.

Six-year limitations period

In applying the six-year limitations period, the appeals court addressed whether the fiduciaries’ failure to remove the proprietary funds after their initial selection constituted a cognizable breach that was separate from the initial alleged violation. The court expressly rejected the employee’s argument that the fiduciaries’ continued failure to heed warnings of the funds’ low performance and high fees, or to seek out such information, constituted a “distinct, cognizable” breach separate from the alleged breach that occurred at selection.
The failure to remedy an initial breach, absent intervening circumstances (i.e., declining fund performance, increased fees, new conflicts of interest) does not, the court advised, establish a new breach sufficient to trigger a new six-year limitations period. As the employee failed to bring her claim within six years after the initial selection of the funds, her action was time-barred.

Source: Fuller v. SunTrust Banks, Inc. (CA-11).

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