Supreme Court Rules ERISA Statute of Limitations Does Not Bar Breach of Fiduciary Duty Claim Challenging 401(k) Plan Investments Made More Than 6 Years Before Filing of the Claim

The statute of limitations governing breach of fiduciary duty claims brought under the Employee Retirement Income Security Act (“ERISA”) provides that such claims are untimely if not brought within 6 years after “the date of the last action which constituted 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). In Tibble v. Edison International, the U.S. Supreme Court ruled that ERISA’s statute of limitations did not bar plaintiffs from pursuing their breach of fiduciary duty claim arising out of investments made by their employer’s 401(k) plan, although the investments were made more than 6 years before plaintiffs filed their claim. The Court held that ERISA plan fiduciaries have an ongoing duty to monitor plan investments and to remove imprudent investments. As long as the alleged breach of this continuing duty occurred within 6 years of suit, a claim challenging a fiduciary’s failure to act will be timely. The Court rejected the argument that only “a significant change in circumstances” triggers the duty to remove imprudent investments.

Background

At issue in Tibble was Edison International’s 401(k) Plan (“the Plan”), establishing individual retirement investment accounts for participating employees. The value of these “defined contribution” accounts depends on the market performance of employee and employer contributions less expenses, such as management and administrative fees. The plaintiffs, participants in the Plan, alleged that the Plan’s administrators violated their fiduciary duties when they had the Plan offer six high priced retail-class mutual funds even though, as a large institutional investor, the Plan could have offered lower priced, but identical institutional-class mutual funds not available to a retail investor. Plaintiff’s maintained that because the Plan offered the higher priced retail-class funds the Plan participants were charged with wholly unnecessary administrative fees.

Three of these higher priced mutual funds were added to the Plan in 1999 and three were added in 2002. Plaintiffs brought their suit in 2007. The district court concluded that plaintiffs could challenge only the decision to offer the three mutual funds offered by the Plan in 2002 because ERISA’s 6-year statute of limitations barred plaintiffs’ claim insofar as it was premised on the three mutual funds added to the Plan in 1999. The Ninth Circuit Court of Appeals affirmed. The Court of Appeals found that plaintiffs had not established “a change in circumstances that might trigger an obligation to review and to change investments within the 6-year statutory period.”

The Supreme Court’s Decision

Writing for a unanimous Court, Justice Breyer observed that an ERISA fiduciary’s duty derives from the common law of trusts, and thus it is the law of trusts that provides the contours of that duty. He then pointed out that “[u]nder trust law, a trustee’s obligation to act prudently includes a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.” Accordingly, the Plan’s fiduciaries were “required to conduct a regular review of [the Plan’s] investment with the nature and timing of the review contingent on the circumstances.” The Ninth Circuit’s conclusion “that only a significant change in circumstances could engender a new breach of a fiduciary duty” was inconsistent with these general principles of trust law. Thus the Supreme Court concluded that “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 Court, however, did not decide whether the Plan’s fiduciaries within the 6-year limitations period applicable to plaintiffs’ claims had failed to conduct the type of review that a prudent fiduciary would have conducted under the circumstances. Rather, the Court remanded the case to the Ninth Circuit to decide that issue “recognizing the importance of analogous trust law.”

Conclusion

It is important to note that in Tibble, the Supreme Court did not adopt a general “continuing violation” theory under which an original investment decision made outside the 6-year limitations period can be challenged as matter of course. Nevertheless, the Court’s decision does make it easier for plan participants to challenge such a decision, provided they allege that the plan’s fiduciaries, under the circumstances, did not, within the limitations period, act prudently by failing to review the original decision and to take appropriate action. Obviously, the case serves as a reminder to plan fiduciaries to review investment decisions on a regular basis.

For answers to any questions regarding this blog or with regard to benefit plans generally, please feel free to contact an attorney in the Gibbons Employment & Labor Law Department.

Richard S. Zackin is a Director in the Gibbons Employment & Labor Law Department.
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