A decision from the Supreme Court of the United States seems to solidify the “ongoing duty to monitor” investments as a fiduciary duty that is separate and distinct from the duty to exercise prudence in selecting investments for use on a defined contribution plan investment menu.
The decision is the latest chapter in the long-running dispute between utility company Edison International and participants/beneficiaries in the Edison 401(k) Savings Plan. The initial suit was filed in 2007, when petitioners argued that Edison International had violated its fiduciary duties with respect to three mutual funds added to the plan in 1999 and three mutual funds added to the plan in 2002. In short, the investments in question were offered to the plan participants as higher-priced retail share classes when cheaper institutional share classes could easily have been obtained.
In subsequent years the case climbed all the way to the Supreme Court. The plaintiffs argued with success that Edison fiduciaries acted imprudently by offering higher priced retail-class mutual funds as plan investments when materially identical but lower priced institutional-class mutual funds were available. But because the Employee Retirement Income Security Act (ERISA) requires a breach of fiduciary duty complaint to be filed no more than six years after “the date of the last action which constitutes a part of the breach or violation” or “in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation (29 U. S. C. §1113),” the district court hearing the case held that the petitioners’ complaint as to the three 1999 funds was untimely because they were included in the plan more than six years before the complaint was filed.
According to the district court, “the circumstances had not changed enough within the six-year statutory period to place respondents under an obligation to review the mutual funds and to convert them to lower priced institutional-class funds.” The 9th U.S. Circuit Court of Appeals subsequently affirmed, concluding that petitioners had not established a change in circumstances that might trigger an obligation to conduct a full due diligence review of the 1999 funds within the six-year statutory period.
Now, the Supreme Court has determined the 9th Circuit erred “by applying §1113’s statutory bar to a breach of fiduciary duty claim based on the initial selection of the investments without considering the contours of the alleged breach of fiduciary duty.” This resulted in the Supreme Court remanding the case back to the appellate court, “to consider petitioners’ claims that respondents breached their duties within the relevant six-year statutory period under §1113, recognizing the importance of analogous trust law.”
As explained in the text of the Supreme Court decision, ERISA’s fiduciary duty is “derived from the common law of trusts,” especially as found in a previous case known as Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc. (472 U. S. 559, 570), which provided that an investment 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.
The Supreme Court says its decision “expresses no view on the scope of respondents’ fiduciary duty in this case, e.g., whether a review of the contested mutual funds is required, and, if so, just what kind of review.” The court does hold, however, that a fiduciary “must discharge his responsibilities ‘with the care, skill, prudence, and diligence’ that a prudent person ‘acting in a like capacity and familiar with such matters’ would use,” as defined in ERISA §1104(a)(1). It’s now up to the 9th Circuit to reconsider the case and decide how the fiduciary duty of prudence should be applied in the context of ongoing investment menu reviews.
Discussing the text of the Supreme Court decision with PLANSPONSOR, Jamie Fleckner, a partner in Goodwin Procter's litigation department and chair of its ERISA litigation practice, said it remains to be seen exactly what the outcome of Tibble v. Edison will mean, either for the parties in the case or for the retirement planning industry more generally.
“This is not really a surprising decision given the discussion that day and how the oral arguments unfolded,” Fleckner observed. “Both parties had basically agreed—the plaintiffs and the defendants—that there is indeed a distinct duty to monitor. This decision is consistent with what the parties agreed to.”
Fleckner went on to observe that this decision “pretty clearly takes no position on exactly what that duty to monitor should look like.” Instead, the decision remands this critical question back to the lower courts to formulate what the duty to monitor should be.
“Even that aspect of the decision isn’t terribly surprising,” Fleckner added. “I remember Justice Sotomayor had said almost precisely that. I’m paraphrasing, but she said, ‘At the Supreme Court we are not triers of fact, and this case should be left up to a trier of fact to determine what the duty to monitor should have been in this case.’ In many ways this decision is consistent with the statement from her.”
Looking forward, the industry is still going to have to wait to see what the 9th Circuit says before practitioners can really determine how this decision will apply more widely, Fleckner said. “They’re really not staking out the outlines of what this duty to monitor might turn out to be—they’re saying, just like in the relevant trust law, this is a separate duty and we’re going to remand it to the 9th Circuit to really figure out what that is.”
“Reading into the fact that the Supreme Court didn’t go down the alternative route is also informative,” Fleckner said. “We can try to imagine what they would have been like, and they could have come down and said there really isn’t an independent duty to monitor and this six-year limitations period under ERISA speaks for itself. The fact that they didn’t go down that road is a strengthening of the independence of the duty to monitor investments under ERISA—I think it’s fair to say that.”
Fleckner said one other important thing to note at this point is that Tibble v. Edison could still actually be decided by the 9th Circuit without bringing any more insight or a more specific definition of the duty to monitor investments under ERISA as a distinct duty from the initial duty to select.
“I would further observe that at the very end of the decision, right in the last paragraph, the court addresses a procedural point that the defendant has raised—namely that the plan participants had from the outset waived the argument about the differences between the two duties, to select and monitor,” Fleckner said. “The Supreme Court rightly observes that it could have rendered its decision based on that procedural issue alone—whether the question had been waived. They decided not to decide this case on the procedural question, but they also left the procedural question open for the 9th Circuit to reconsider.”
This means the appellate court could still make its decision based on this procedural point—without actually getting into what the shape and scope of the duty to monitor actually entails.
“There is still a lot that is going to be needed to be sorted out from this decision,” Fleckner concluded. “The Supreme Court has said the duty to monitor is something separate from the duty of initial selection, but now the case is back to lower courts to decide what that looks like, and they could end up deciding something else entirely—deciding this on procedural grounds.”
Another ERISA expert, Nancy Ross, a partner in the Employment and ERISA Litigation practice at Mayer Brown, tells PLANSPONOSOR the Supreme Court has “recognized the obvious point that fiduciaries have a duty to monitor all investments in their plan lineup regardless of how long they have been in the plan.”
She says the decision, on its face, may appear to give the plaintiffs a route to challenge decades-old investment decisions, “but as a practical matter, the court’s opinion says no more than that the duty to monitor survives the passage of time.”
“Since most fiduciaries already review existing investments in their ongoing reviews, this decision is not a game-changer,” Ross suggests. “It just offers another reminder of the importance of having a prudent, established process in place for each element of plan administration.”