(Article from Securities Law Alert, May 2015)
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On May 18, 2015, the Supreme Court considered “whether a fiduciary’s allegedly imprudent retention of an investment is an ‘action’ or ‘omission’ that triggers the running” of the six-year statute of repose for breach of fiduciary duty claims brought under the Employee Retirement Income Security Act of 1974 (“ERISA”).[1] Tibble v. Edison Int’l, 2015 WL 2340845 (May 18, 2015) (Breyer, J.).
Background
In 2007, beneficiaries of the Edison 401(k) Savings Plan (the “Plan”) brought suit in the Southern District of California against Edison International and the Plan’s fiduciaries alleging that defendants had “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.” Three of these funds were added to the Plan in 1999, more than six years before plaintiffs filed suit.
The district court dismissed plaintiffs’ claims in connection with these three funds on timeliness grounds. The Ninth Circuit affirmed, finding plaintiffs’ claims “untimely because [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 Ninth Circuit focused “upon the act of ‘designating an investment for inclusion’ to start the 6-year period” (quoting Tibble v. Edison Int’l, 729 F.3d 1110 (9th Cir. 2015)). In the Ninth Circuit’s view, “‘[c]haracterizing the mere continued offering of a plan option, without more, as a subsequent breach would render’ the statute meaningless and could even expose present fiduciaries to liability for decisions made decades ago” (quoting Tibble, 729 F.3d 1110). Plaintiffs appealed.
Supreme Court Holds a Plaintiff May State an ERISA Breach of Fiduciary Duty Claim by Alleging That the Fiduciary Failed to Monitor Plan Investments and Remove Imprudent Investments Within the Six Year Statute of Repose
The Supreme Court determined that “the Ninth Circuit [had] 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.” The Court explained that “under trust law,” which courts “often must look to” when “determining the contours of an ERISA fiduciary’s duty,” “a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.”
Examining trust law, the Court found that “a trustee has a continuing duty to monitor trust investments and remove imprudent ones.” The Court stated that “[t]his continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.” A trustee may not “assume that if investments are legal and proper for retention at the beginning of the trust, or when purchased, they will remain so indefinitely.” Instead, a trustee must systematically review trust investments “‘at regular intervals’ to ensure that they are appropriate.”
Applying these trust law principles to ERISA fiduciaries, the Court held that “[a] plaintiff may allege that a fiduciary breached the duty of prudence [under ERISA] by failing to properly monitor investments and remove imprudent ones.” The Court further ruled that an ERISA claim “is timely” “so long as the alleged breach of [this] continuing duty occurred within six years of [the] suit.”
The Court remanded the action to the Ninth Circuit for consideration of whether the ERISA duty of prudence “require[d] a review of the contested mutual funds here, and if so, just what kind of review” was required. Notably, the Court “express[ed] no view on the scope of respondents’ fiduciary duty in this case.”
[1] Pursuant to ERISA, “a breach of fiduciary duty complaint is timely if filed no more than six years after ‘the date of the last action which constituted 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’” (quoting 29 U.S.C. § 1113).