The Supreme Court Confirms Plan Sponsors Need to Continuously Monitor their Investment Options

It isn’t often that the Supreme Court rules unanimously, and it’s even less common that they rule on a subject matter which, as retirement plan advisors, we deal with every day. So yesterday’s ruling by Justice Breyer, which not only upheld, but strengthened the fiduciary standard we champion every day was both affirming and not at all surprising.

The unanimous decision by the Supreme Court in Tibble v Edison essentially confirmed that plan sponsors have a responsibility to continuously monitor their investment lineups and that failure to do so may constitute a fiduciary breach. What was new about the Tibble ruling was that it established that the six-year statute of limitations on fiduciary breaches will not trump a plan sponsor’s ongoing fiduciary obligations, and may not serve as a bar to legal action.

Tibble v Edison is actually not about investment performance, rather it is one of the first excess fee/revenue share lawsuits filed. Participants claimed that retail share class funds selected by the sponsor resulted in excess fees being charged to the plan.

The case is not the largest of its kind, but it has raised an interesting debate: Roughly half of the retail funds were selected in 1999, more than 6 years before the suit was filed. Does the statute of limitations apply to the selection of those funds?

The sponsor successfully argued that the statute did apply, and a subsequent award of $370,372 was made on only those retail funds selected during the 6 years prior to the litigation being filed. The Ninth Court of Appeals agreed with the initial ruling, stating that only a “significant change in circumstances” would have triggered the need for the sponsor to perform a full due diligence review on the funds.

The participants subsequently argued to the Supreme Court that the plan sponsor had a responsibility to constantly re-evaluate the fund lineup, and that the statute of limitations would not start running as long as the sponsors retained the funds. The Supreme Court agreed unanimously, stating disagreement with the Ninth Court’s standard of review because it was not consistent with the law of trusts, which ERISA is based on.

This portion of the ruling supports and confirms what we already knew; the fiduciary obligation to monitor a plan’s investment lineup is ongoing and not a one-time act. By the end of the oral arguments on February 24th, it was evident that even the attorneys for the plan sponsor had begun to agree that the retention of a fund constituted a fiduciary act, which reset the 6 year statute.

It is fair to assume that the ruling can be applied to any area of fiduciary liability where an ongoing act is required. While many experts fear that this ruling will significantly expand 401(k) litigation, our opinion is that it may expand the scope and timeframe of litigation, rather than increasing the number of new suits filed.

The ruling did fall short of providing any guidance on what constitutes prudent monitoring of investment options. While the Court upheld that fiduciaries had an obligation to constantly monitor their funds, they declined to rule on whether or not the fiduciaries had actually done so in this case, sending it back to a lower court to determine this.

This is potentially the most interesting part of the case. If the lower court rules on how often and how closely plan fiduciaries must look at their investments in order to satisfy their duty to monitor, it would serve as valuable guidance for all plan fiduciaries going forward.

Unfortunately, courts have typically stayed clear of setting direct procedure and we expect them to do the same in this case. They may rule on whether the fiduciaries followed a prudent procedure or not, but it is unlikely their ruling will provide any direct guidance beyond what we already have.

Summary

Anytime the Supreme Court provides clarification on an area of the law, it is valuable and has lasting impact. In this situation, however, we can only assume that the Supreme Court agreed to hear the case to give themselves a bit of a break between some of the larger, more complex cases in front of them this session. The law in this case was relatively clear and their ruling was predictable.

Still, it was important. Fiduciary liability and responsibility are used as marketing terms frequently in our industry. Unfortunately, for as often as they are discussed, many sponsors still do not have a prudent process in place to fulfill their obligations. Having the Supreme Court rule so clearly should serve as a reminder to all plan sponsors of how important their fiduciary obligation is.
For a PDF copy of this article, click here.

Written by Andrew S. Zito, AIF®, Executive Vice President

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