BREAKING NEWS: Supreme Court Rules on 401(k) Plan Prudent Management
May 18, 2015
The United State Court of Appeals for the Ninth Circuit ("9Cir") affirmed the Central District of California's ("CDCA's") judgment in a class action brought under the Employee Retirement Income Security Act by beneficiaries who alleged that their pension plan was managed imprudently and in a self-interested fashion. In rejecting a continuing violation theory, the 9Cir held that under ERISA's six-year statute of limitations, the CDCA correctly measured the timeliness of claims alleging imprudence in plan design from when the decision to include those investments in the plan was initially made.
On appeal to the United States Supreme Court from the 9Cir is the question of:
Whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U. S. C. §1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.
Glenn Tibble Et Al., Petitioners, v. Edison International, Et Al.(Opinion, United States Supreme Court, 575 U.S. ____ 2015, May 18, 2015)
From the Supreme Court's Syllabus:
In 2007, petitioners, beneficiaries of the Edison 401(k) Savings Plan (Plan), sued Plan fiduciaries, respondents Edison International and others, to recover damages for alleged losses suffered by the Plan from alleged breaches of respondents' fiduciary duties. As relevant here, petitioners argued that respondents violated their fiduciary duties with respect to three mutual funds added to the Plan in 1999 and three mutual funds added to the Plan in 2002. Petitioners argued that respondents acted imprudently by offering six higher priced retail-class mutual funds as Plan investments when materially identical lower priced institutional-class mutual funds were available. Because 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 held that petitioners' complaint as to the 1999 funds was untimely because they were included in the Plan more than six years before the complaint was filed, and the circumstances had not changed enough within the 6- 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 Ninth Circuit 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 6-year statutory period.
Held: The Ninth 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. ERISA's fiduciary duty is "derived from the common law of trusts," Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U. S. 559, 570, which provides that a 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. So long as a plaintiff's claim alleging breach of the continuing duty of prudence occurred within six years of suit, the claim is timely. This Court 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. 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. §1104(a)(1). The case is remanded for the Ninth Circuit to consider petitioners' claims that respondents breached their duties within the relevant 6-year statutory period under §1113, recognizing the importance of analogous trust law. Pp. 4-8.
729 F. 3d 1110, vacated and remanded.
As stated in the Supreme Court's Opinion:
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. 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.
In short, under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. A plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones. In such a case, so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely. The Ninth Circuit erred by applying a 6- year statutory bar based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty.
Page 6 -7 of the Supreme Court Opinion
READ the Full-Text:
Supreme Court Opinion (May 18, 2015)
Supreme Court Oral Argument Transcript (February 25, 2015)
9th Circuit Opinion (March 21, 2013)