Supreme Court: Fiduciaries Have Ongoing Duty to Monitor Investments

Allen Smith, J.D. By Allen Smith, J.D. May 18, 2015

Plan fiduciaries for 401(k) plans have a continuing duty—separate from the duty to exercise prudence in selecting investments—to monitor and remove imprudent investments, the U.S. Supreme Court held on May 18, 2015, in Tibble v. Edison International.

The unanimous decision will lead to more litigation in the short run, as it revived the plaintiffs' complaint that funds added in 1999 to a 401(k) plan were imprudently expensive, according to Jamie Fleckner, an attorney with Goodwin Procter LLP in Boston. Lower courts had held the litigation over the 1999 funds exceeded a six-year statutory time limit.

Nancy Ross, an attorney with Mayer Brown in Chicago, agreed that litigation would increase, and said that the decision "stresses the importance of procedural prudence in administering a plan."

High-Priced Mutual Funds

In 2007, several individual beneficiaries of the Edison 401(k) Savings Plan sued California-based Edison seeking to recover alleged losses suffered by the plan. They claimed that Edison violated its fiduciary duty by offering six higher-priced retail-class mutual funds as plan investments when nearly identical lower-priced institutional-class mutual funds were available. The plaintiffs claimed that a large investor with billions of dollars, like the plan, could obtain identical lower-priced institutional mutual funds not available to a retail investor.

The U.S. District Court for the Central District of California agreed with the plaintiffs regarding the three funds added to the plan in 2002. But it ruled that their claim was untimely for the three funds added in 1999 because they were included in the plan more than six years before the complaint was filed, and the six-year statutory period had run.

The 9th U.S. Circuit Court of Appeals affirmed, because plaintiffs had shown no change in circumstances that might trigger an obligation to review and change investments within the six-year statutory period.

However, the Supreme Court reversed and sent the case back to the 9th Circuit, ruling that no change in circumstances was necessary to trigger the duty to monitor.

"A trustee has a continuing duty to monitor trust investments and remove imprudent ones," the Supreme Court stated. And so does a fiduciary, the court held.

Whether the plaintiffs waived the argument that Edison did not exercise its duty to monitor is for the 9th Circuit to decide, the Supreme Court ruled. The lower court also must decide whether Edison in fact met its duty to monitor.

Unclear Duty to Monitor

The Supreme Court did not delineate much about the duty to monitor, Ross said. There was no explanation of how many meetings per year should be held to review all investments. Ross said the minimum expectation is likely to be at least annually and probably quarterly for performance, but ultimately that is for the lower courts to work out. The meetings should not be pro forma, but instead should show real deliberation, not just a rubberstamping of benchmarks, she remarked.

Fiduciaries should talk among themselves to flesh out the duty to monitor more, she recommended. What are their colleagues doing in monitoring? What benchmarks are they using?

"It's all about a prudent process at this standpoint," she said. "You can't have haphazard monitoring."

But she emphasized, "Most sophisticated fiduciaries know they need a proper review," saying that the decision "is not a game changer."

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

Related SHRM Article:

Tibble v Edison Round II: A Game Changer Ends Not with a Bang but with a Whimper, The SHRM Blog, May 2016


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