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Recently, the Supreme Court handed down its unanimous decision in Tibble v. Edison International, a defined contribution plan fee case. The Court vacated the Ninth Circuit’s decision, which had been in favor of sponsor fiduciaries, and remanded the case back to the Ninth Circuit for further proceedings. The case involves the application of ERISA’s statute of limitations and the duty of sponsor fiduciaries to monitor the prudence of their plan fund menu decisions on an ongoing basis.
In this article we briefly review the decision.
This suit was brought in 2007 by participants in Southern California Edison’s 401(k) plan against Edison, its corporate parent, and certain plan officials. The claim under review by the Supreme Court involves an allegation that defendants breached their ERISA duties of loyalty and prudence by including the retail share (higher fee) class, rather than the institutional share class, of six mutual funds in the plan’s fund menu. Three of those six funds were selected for inclusion in the fund menu in 2002, which is within ERISA’s six-year statute of limitations. Let’s call those the ‘un-barred funds.’ The lower court found that plan fiduciaries violated ERISA’s duty of prudence with respect to the inclusion of those funds in the fund menu.
The other three funds were selected for inclusion in 1999, and the lower court held that claims with respect to those funds were barred by the statute of limitations. Let’s call those the ‘barred funds.’ It’s this decision by the lower court, which was affirmed on appeal to the Ninth Circuit, that the Supreme Court reviewed.
As we said, the Supreme Court vacated and remanded the Ninth Circuit’s decision – basically, it sent the case back to the Ninth Circuit for reconsideration. The Court’s decision turns on its view of a fiduciary’s obligation to regularly monitor the prudence of the inclusion of a fund in a plan fund menu.
The district court and the Ninth Circuit seemed to articulate the following rule for the selection and monitoring of funds: the initial selection of a fund for inclusion in a plan fund menu must be prudent. That rule is the basis for its decision that the defendants breached their fiduciary duty with respect to the un-barred funds. After selection, a ‘full due-diligence review’ of the selection is required only when changed circumstances warrant it. It is up to plaintiff-participants to show that there were such changed circumstances, and it found that they had not.
In the context of Tibble, let’s be clear what the lower court standard would mean. It seems clear that, in the view of the lower court, the barred funds were not prudently selected, but no action could be brought with respect to that violation because of the statute of limitations. By implication, their continued inclusion in the plan remained imprudent, but because there were no changed circumstances, there was no subsequent violation.
The Supreme Court disagreed with that analysis. Citing the common law of trusts from which an ERISA fiduciary’s duty is derived, it said:
We believe the Ninth Circuit erred by applying a statutory bar to a claim of a “breach or violation” of a fiduciary duty without considering the nature of the fiduciary duty. The Ninth 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. (Emphasis added)
Thus, the Supreme Court found that the Ninth Circuit incorrectly viewed the plan fiduciary as having only one duty – the duty to prudently select a fund. The duty to review that decision in the light of changed circumstances is, in effect, derivative of that primary duty. Instead, in the view of the Supreme Court, the fiduciary has two duties. The first is to prudently select a fund. The second is to prudently review that selection (and any other investment selections) on a regular basis. Violation of that second duty would not be barred by the statute of limitation. Indeed, it would seem that an ongoing duty to monitor would never be barred by the statute of limitations.
This approach, in effect, changes the question. The lower court (and the Ninth Circuit) had asked: “Has anything changed since the original selection that would require plan fiduciaries to re-visit their earlier decision?” What it should have asked is: “What is the nature of the fiduciary’s ongoing duty-to-review, and did plan fiduciaries breach that duty?”
In remanding the case to the Ninth Circuit, the Supreme Court emphasized that it was not saying what the standard for ongoing review was, leaving that issue for the lower court. Indeed, the Ninth Circuit could even consider the issue of changed circumstances as a factor in determining how thorough a review should be conducted by the plan fiduciary:
Of course, after the Ninth Circuit considers trust-law principles, it is possible that it will conclude that respondents did indeed conduct the sort of review that a prudent fiduciary would have conducted absent a significant change in circumstances.
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The exact scope of the duty to monitor plan investments and fund menu selections is a critical issue for plan fiduciaries. That’s true for a couple of reasons: first, because fund menu selection – particularly in the context of fee litigation – is going to be a hot-button issue for the foreseeable future; and second, because the scope of the duty to monitor is a fundamental element in the emerging defined contribution fiduciary outsourcing movement.
In this case, the Supreme Court took a small step towards clarifying this issue, explicitly identifying the regular review of the prudence of earlier investment decisions as an ERISA fiduciary duty.
We will continue to follow this issue.