The ongoing monitoring duty of fiduciaries
Supreme Court rules retirement plans must have vigorous reviews of investment decisions
On May 18, the U.S. Supreme Court ruled unanimously in Tibble v. Edison International that retirement plan fiduciaries have an ongoing duty to monitor plan investments. Although not unexpected, the decision reaffirms that retirement plan fiduciaries must have a vigorous investment monitoring program in place.
In a 2007 lawsuit, participants in the Edison 401(k) Savings Plan sued various Edison International entities and the plan fiduciaries alleging numerous claims under the Employee Retirement Income Security Act of 1974 (ERISA).
The claims included that the plan fiduciaries should have offered identical lower-cost institutional shares instead of the more expensive investment options selected in 1999 and 2002. The plaintiffs argued that losses were suffered because the inclusion of the higher-priced funds resulted in greater expenses that lowered potential returns.
The lower courts ruled that the plan fiduciaries had violated ERISA’s duty of prudence by failing to investigate the possibility of offering the institutional share class funds with lower fees. Although the expense ratios of the mutual funds selected were in line with expected ratios for a plan of its size, the lower courts held that the defendants had failed to undertake the procedural prudence required by ERISA.
Edison had argued that it based its decision to offer the retail-class funds on advice from its investment consultant, Hewitt. The court rejected this argument, stating that independent expert advice does not absolve a fiduciary of responsibility and that there was no evidence in the record that Edison ever considered the possibility of using the institutional class.
Although ruling in favor of the plaintiffs, the lower courts limited the damages to only claims based on the 2002 investments. All claims relating to the 1999 investments were statutorily barred by ERISA’s six-year limitations period, as the lower courts found that there had not been any change in circumstances that would trigger an obligation to conduct a full due-dilligence review of the 1999 funds within the six-year-period.
But the Supreme Court reversed the lower courts’ ruling on ERISA’s six-year limitations period.
Although the Supreme Court stated that the lower court correctly asked whether the last action, which constituted a part of the breach or violation of the duty of prudence, occurred within the relevant six-year period, it was incorrect to focus on the act of designating an investment for inclusion in the plan to start the six-year period.
Instead, the court ruled, the lower courts should have recognized that a fiduciary is required to conduct a regular review of investments with the nature and timing of the review contingent on the circumstances.
Although sending the case back to the lower courts to decide whether or not Edison and the fiduciaries had breached their fiduciary duty in connection with the 1999 investments, the Supreme Court ruled that ERISA imposes an ongoing duty to monitor investments and remove imprudent ones. The continuing duty exists separate and apart from the duty to exercise prudence in selecting investments at the outset.
The court ruled that a fiduciary should not assume that investments that were legal and proper for retention when purchased remain so indefinitely.
In light of the continuing duty to monitor investments and remove imprudent ones, so long as the alleged breach of the continuing duty occurs within six years of suit, a plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones. Such a case could be filed years after the date the investments were added to the plan.
In light of the Supreme Court’s ruling, employers and fiduciaries should not assume that a detailed review of investments upon the initial inclusion in the plan will suffice to protect against liability indefinitely. Rather, fiduciaries must constantly monitor whether or not the initial investment decisions remain prudent ones.
Fiduciaries should establish written procedures for the periodic monitoring of all plan investments and have a written investment policy statement to set forth review criteria. In order to prove that monitoring activities are ongoing, fiduciaries must create detailed written records of all monitoring activities and retain these records indefinitely in case a claim is brought in the future.
John E. Rich Jr. a director at McLane, Graf, Raulerson & Middleton, specializes in employee benefits, pension, ERISA and tax-related matters. He can be contacted at 603-628-1438 or firstname.lastname@example.org.