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U.S. Supreme Court Finds Employers Must Continuously Monitor 401(k) Investments

Volume 14, Issue 9
May 18, 2015

Earlier today, in Tibble v. Edison International, a unanimous United States Supreme Court reversed a decision by the Ninth Circuit Court of Appeals that a 2007 lawsuit brought by employees concerning changes made to the mutual funds offered as part of their employer's 401(k) plan were barred by the six-year statute of limitations period for claims under the Employee Retirement Income Security Act (ERSIA), thereby clarifying employers' continuing fiduciary duty of prudence to regularly monitor trust investments.

The employees' lawsuit alleged breaches of the fiduciary duties owed to them under ERISA as 401(k) plan participants and involved the addition of six, high-priced, retail-class mutual funds to the plan, three in 1999 and three in 2002, when materially identical, lower priced, institutional-class mutual funds were otherwise available. With respect to the claims concerning the funds added in 2002, the Ninth Circuit Court agreed that the employees had proven a breach of fiduciary duty given the defendants' inability to offer a credible explanation as to why the more expensive funds, which cost plan participants wholly unnecessary administrative fees, were selected over identical, lower priced funds. However, the Ninth Circuit Court found the employees' claims related to the three funds added in 1999 were untimely because the decision to select those funds was made more than six years before the lawsuit was filed and there was no evidence of "significant changes" that would have triggered a full review of the funds after they were selected to be part of the plan.

The only issue before the court was the Ninth Circuit Court's ruling concerning the funds added in 1999. The Supreme Court found that the Ninth Circuit Court failed to consider the full nature of the fiduciary duties involved, explaining that, in addition to the duty to exercise prudence in selecting investments at the outset, the fiduciary duties under ERISA include a separate, continuing duty of prudence to regularly monitor and remove imprudent trust investments. Thus, the Court held that so long as a plaintiff's claim alleging a breach of the continuing duty of prudence occurred within six years of the lawsuit being filed, the claim is timely. The Court expressed no opinion as to the nature of the evidence of a breach of the continuing duty of prudence to regularly monitor trust investments in the Tibble case, or even whether the employees properly raised the claim of a breach of the duty of prudence in the absence of a significant change in circumstances, leaving those issues for the Ninth Circuit Court to address on remand.

The Court's decision in the Tibble case reconfirms that employers have a continuing duty to monitor, and remove imprudent, trust investments offered under their 401(k) plans, including the amount of fees attached to such investments.

Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.