In Tibble, et. al. v. Edison International, et. al., the Supreme Court held that a plan fiduciary’s responsibility to select plan investment options prudently does not end with that selection, or even when the general ERISA statute of limitations has expired six years after the selection. Rather, the plan fiduciary has to continue to monitor the performance and other qualities of the investment selection to ensure that both the selection and retention of that option over time continues to be prudent.
The Case
In the Tibble case, participants in a 401(k) plan alleged that the plan’s investment fiduciaries (including the employer, Edison International) had breached their duties under ERISA by improperly selecting three retail class mutual funds that had higher fees than three comparable institutional class funds which could readily have been selected as plan investment options, and then failing to remove those retail investment funds from the plan’s investment menu. Although acknowledging that the Edison fiduciaries had indeed breached its fiduciary duties, the district court also held that the participants’ claims were time-barred under ERISA’s six-year statute of limitations, and further that the participants had failed to show that, given relatively insignificant changes in facts and circumstances during the six-year statutory period, the Edison fiduciaries had a duty to review the retail class funds and determine whether to replace them with lower-cost institutional class funds. On appeal, the Ninth Circuit affirmed.
However, in a unanimous decision the Supreme Court held that the Ninth Circuit had determined incorrectly that the participants’ claims were time-barred and had improperly jumped to the conclusion that only a significant change in circumstances would compel a plan fiduciary to review its selection of plan investment funds. Referring to the common law of trusts, the Court stated 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, and to systematically consider all the investments of the trust at regular intervals to ensure that they are appropriate. Applying that standard to Tibble, the Court determined that so long as a claim alleging breach of the continuing duty of prudence occurs within six years of suit, the claim is timely. The Court remanded the case to the Ninth Circuit to reconsider the participants’ claims in view of the Court’s holding that a plan investment fiduciary has an ongoing duty to monitor plan investments.
The Impact
The Tibble case has potentially broad implications not only to plan investment fiduciaries, but other plan fiduciaries as well, and not only with respect to plan investment decisions, but potentially any fiduciary decisions.
Reading Tibble, we can conclude that it is not enough for a plan investment fiduciary to act in accordance with ERISA’s standards of conduct at the time the fiduciary makes an investment decision, and then breathe a sigh of relief once ERISA’s six-year statute of limitations has tolled. Rather, the fiduciary has an ongoing responsibility to confirm that its decision continues over time to meet ERISA’s fiduciary standards, including prudence. Accordingly, investment fiduciaries (such as the sponsoring employer) will have to monitor investment options under a plan not only with respect to performance over time, but fees charged – both directly and indirectly – in light of a changing fee landscape and less expensive alternatives.
Moreover, in practice the Tibble case can be applied to cover any decision made by any plan fiduciary, whether or not investment-related. For example, if a plan fiduciary selects a plan service provider (such as a plan administrator, plan record keeper, trustee, plan investment advisor or plan investment manager) strictly in accordance with ERISA standards, the plan fiduciary making the selection nevertheless will have to monitor the service provider to make sure that the retention of that service provider continues to meet ERISA standards over time. For an ERISA fiduciary, the duty to monitor is no less important than the duty to act prudently when first making a decision.
Unanswered Questions
Although the Supreme Court remanded the Tibble case to the Ninth Circuit to reconsider its holding in light of a fiduciary’s ongoing duty to monitor, the Court did not attempt to outline the scope of a fiduciary’s duty to monitor.
For example, when monitoring an investment decision, how often and under what circumstances is the fiduciary obligated to review its decision? Annually? Semi-annually? Quarterly? Whenever significantly changing circumstances warrant?
When reviewing an investment decision, what kind of review must the fiduciary conduct, and how extensive must it be?
Given the ongoing responsibility of a fiduciary to monitor its plan investment decisions, does this mean that, at least in certain cases, and given changing circumstances and investment alternatives, ERISA’s six-year statute of limitations may never toll?
Should a sponsoring employer or other in-house investment fiduciary engage an investment advisor or manager to provide professional plan investment advice?
What responsibility does the employer have to a plan investment advisor or manager in clarifying the scope and direction of the plan investment menu, and how often must the employer and advisor/manager meet to discuss investment alternatives?
Some Lessons Learned
Lessons from the Tibble case include the following:
1. The employer and other plan fiduciaries must meet ERISA’s standards of conduct both in making initial decisions and monitoring those decisions over time.
2. In order to demonstrate compliance with ERISA standards, the employer and other plan fiduciaries should document that they meet those standards both at the time of their initial decisions as well as when monitoring those decisions.
3. The employer, or other in-house investment fiduciary, should maintain and periodically review plan funding policies, investment guidelines and other plan investment directions, and, as applicable, communicate those policies, guidelines and directions to plan investment advisors/managers or other plan investment service providers in order to ensure ongoing compliance with ERISA standards.
4. Whenever ERISA standards so demand, plan investment options should be suspended, removed or replaced, taking into account investment performance, fees charged directly or indirectly, investment alternatives and other factors.
5. Whenever ERISA standards so demand, plan service providers should be suspended, removed or replaced, taking into account performance, fees charged directly or indirectly, alternatives and other factors.
