Supreme Court confirms continuing duty of fiduciaries to monitor and remove imprudent plan investments

A suit brought within six years of an alleged breach by plan fiduciaries of their continuing duty to monitor and remove imprudent plan investments was not barred by ERISA’s statute of limitations, according to the United States Supreme Court. The Court unanimously validated the “continuing duty” standard, under which fiduciaries have a continuing duty, separate and apart from the responsibility to exercise prudence in initially selecting plan investments, to monitor and remove imprudent plan investments.

Allegedly imprudent retail fund investment options

Individuals participating in a 401(k) plan maintained by Edison International brought suit in 2007, alleging violations of fiduciary duty with respect to three mutual funds added to the plan in 1999 and three mutual funds added to the plan in 2002. Specifically, the participants charged that the plan fiduciaries acted imprudently by offering higher priced retail-class funds as a plan investment, despite the fact that materially identical lower-priced institutional class funds were available. According to the participants, the allegedly imprudent decision of the plan fiduciaries to invest in expensive retail share classes, effectively reduced the plan’s assets through the payment of excess fees.

A federal trial court ruled that the plan fiduciaries had failed to exercise the care, skill, prudence, and diligence required under ERISA with respect to the three funds added to plan in 2002. However, the court dismissed, as time-barred, fiduciary breach claims with respect to the 1999 funds, noting that the funds were included in the plan more than six years before the complaint was filed in 2007.

The participants argued that the 1999 mutual funds underwent significant changes within the six-year statutory period that should have been sufficient to cause the plan fiduciaries to undertake a full due-diligence review and convert the higher priced retail funds to low-priced institutional class funds. The trial court, however, determined that circumstances had not changed to the extent necessary to obligate the fiduciaries to review the retail funds and convert them to institutional funds.

The Ninth Circuit affirmed, ruling that the act of designating an investment for inclusion in the plan starts the six-year statute of limitations under ERISA for claims asserting imprudence in the design of the plan investment menu. The appeals court agreed with the trial court that the participants had not established the significant change in circumstances that was necessary to require the fiduciaries to review a change in the investments within the six-year period.

Note: Under ERISA §413, no action alleging fiduciary breach may be brought after the earlier of:

    (1) Six years after (a) the date of the last action which was part of the breach or violation or (b) in the case of an omission, the latest date on which the fiduciary could have cured the breach of violation; or
    (2) Three years after the earliest date on which the party bringing suit had actual knowledge of the breach or violation.

“Continuing fiduciary duty” rule. The applicable statute of limitations period, may be extended, however, if the fiduciary is viewed as having a “continuing duty“ to the plan. For example, under the prudent investor rule, a fiduciary has a continuing duty to review plan investments and to advise the fund to divest itself of unlawful or imprudent investments. The Second Circuit has further ruled that a fiduciary‘s continuing obligation to monitor plan investments effectively allows actions based on the prudent investor rule to be brought later than the three and six year statute of limitations period generally applicable to claims for breach of fiduciary duty that are based on the occurrence of a single event (Morrissey v. Curran, CA-2 (1977), 567 F2d 546). Similarly, the Seventh Circuit explained, fiduciaries have a “continuing fiduciary duty to review plan investments and eliminate imprudent ones“ (Martin v. Consultants and Administrators, CA-7 (1992), 966 F. 2d 1078). Thus a fiduciary with a continuing duty to monitor investments was subject to suit for failing to detect unreasonable fees and receiving unreasonable compensation under a contract that may been signed beyond the applicable limitations period (Diebold v. Northern Trust Invs., N.A., DC IL (2012), 201 U.S.Dist LEXIS 132715)).

By contrast, the Tibble court rejected the continuing violation theory, ruling that the act of designating an investment for inclusion on a plan’s investment menu starts the six-year period for claims asserting imprudence in the design of the plan menu. Accordingly, such claims must be filed within six years of the initial designation. Disregarding the ongoing duty of prudence during the limitations period, the Ninth Circuit has determined that the initial selection of the plan investments to be the last action constituting the alleged breach of duty.

Similarly, the Fourth Circuit has found time-barred a claim that fiduciaries breached their duty of prudence by failing to remove or replace imprudent funds in a 401(k) plan where the funds were initially selected before the limitations period (David v. Alphin, CA-4 (2013), 704 F. 3d 327).

The Eleventh Circuit has also determined a claim for breach of fiduciary duty based on the failure to remove imprudent funds from a 401(k) plan to be time barred where the funds were first selected before the limitations period (Fuller v. Suntrust Banks, Inc., CA-11 (2014), 744 F. 3d 685). The continued failure of the fiduciaries to heed warnings of the funds’ poor performance and high fees (or to seek out such information) was not, the court stressed, “a distinct, cognizable breach that occurred at the selection.”

Continuing fiduciary duty under trust law to monitor prudence of plan investments

A unanimous Supreme Court forcefully confirmed the validity of the continuing fiduciary duty rule, holding that the Ninth Circuit erred by applying a statutory bar to a fiduciary breach claim without considering the nature of the fiduciary duty. The lower courts, the Supreme Court explained, failed to recognize that, under trust law, a fiduciary is required to conduct a regular review of its investments, with the nature and timing of the review conditioned on the circumstances.

The Court stressed that fiduciary duties under ERISA are derived from the common law of trusts. Accordingly, the trustee of an ERISA plan has a continued duty to monitor trust investments and remove those found to be imprudent. This continuing duty, the Court explains, exists “separate and apart” from the trustee’s duty to exercise prudence in initially selecting investments for inclusion in a plan’s investment menu.

Citing extra-judicial authority, the Court noted that trustees may not assume investments will remain appropriate indefinitely. Trustees must systematically consider all trust investments at regular intervals, exercise continuing oversight of prior investments, and remove imprudent investments.

An alleged breach of a fiduciary’s continuing duty must still occur within six years of the filing of a suit, the Court advised. However, a court may not impose a six-year statutory bar based solely on the initial selection of funds, without considering the “contours” of the alleged breach of fiduciary duty.

Note: The Supreme Court expressed no view as to whether ERISA’s duty of prudence required the plan fiduciaries to review the challenged mutual funds. The case was remanded to the Ninth Circuit for a determination of whether the fiduciaries actually breached their duties within the relevant six-year limitations period, recognizing the importance of analogous trust law.

Source: Tibble v. Edison International (U.S. Sup Ct).

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