U.S. Supreme Court Finds Plan Sponsors May Be Liable for Violation of Fiduciary Duty Based Upon Investments Chosen Outside Statute of Limitations
On May 18, 2015, the U.S. Supreme Court issued its decision in Tibble v. Edison International. As discussed at Michael Best’s 27th Annual Labor & Employment Relations Law Seminar, the case focused on whether ERISA’s six-year statute of limitations barred a claim that Employee Retirement Income Security Act (ERISA) fiduciaries breached their fiduciary duty by offering higher-cost retail-class mutual funds to participants even though lower-cost institutional-class mutual funds were available. In particular, the investment choices in this case were made more than six years prior to the inception of the claim.
In a unanimous decision, the U.S. Supreme Court held that ERISA’s fiduciary duty imposes upon the trustee a continuing duty to monitor and remove imprudent trust investments. Consequently, the Court found that there could be a continuing violation where a selected investment opportunity, which appeared prudent when it was selected, may become imprudent and, therefore, cause the fiduciary to violate its fiduciary duty by not replacing it.
What Should Employers Take Away?
This case highlights the need for plan sponsors to establish and follow processes for reviewing fiduciary decisions. Notably, this case does not decide whether the plan sponsor actually violated its fiduciary duty in the case, it merely permits the parties to litigate that issue. Further, the Court provides no guidance on what the scope of the plan sponsor’s review of the contested investment should be.
In applying trust law, the Court held that plan sponsors must realize that as fiduciaries, they have a continuing duty to monitor investments and remove imprudent ones. This continuing duty exists separate and apart from the duty to exercise prudence in selecting investments at the outset. Consequently, fiduciaries are advised to create and implement policies for periodic review of all investments held in the trust and for changing investments that no longer may be prudent.