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Supreme Court: Employers Must Review 401(k) Investments

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In a unanimous decision, the Supreme Court has ruled in favor of participants in Edison International’s 401(k) plan who claimed company fiduciaries violated their duty to monitor three retail-class mutual funds.

The decision in Tibble vs. Edison International overturns the ruling of the 9th Circuit Court of Appeals, which upheld a ruling from U.S. District Court for the Central District of California in favor of Edison.

“ERISA’s fiduciary duty is derived from the common law of trusts, which provides 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,” wrote Justice Stephen Breyer, who delivered the opinion for the court.

The question before the court was whether the plaintiffs’ claim against three retail-class mutual funds Edison added to its investment lineup in 1999 constituted a fiduciary breach, because materially equivalent and cheaper institutional shares existed.

With respect to three other retail-class funds added in 2002, the lower courts found Edison in breach of its fiduciary duties for adding the more expensive investment options.

The District and Appellate court rulings dismissed the claims against the three funds added in 1999 on the grounds that they were not timely; one part of ERISA’s statue of limitation says that claims must be brought within six years of the alleged fiduciary breach. Edison participants brought their claim in 2007, eight years after Edison fiduciaries added the first three retail-class funds in 1999.

Plaintiffs’ counsel, led by attorneys from St. Louis-based Schichter, Bogard and Denton, argued all along that ERISA’s statue of limitation requires fiduciaries to prudently monitor their investment selections, and that the six-year limit to make a claim begins at the last point fiduciaries proved to have not prudently monitored the investments, not at the time the investments were first chosen.

When accounting for that component of ERISA’s statue of limitations, the plaintiffs’ claim in Tibble vs. Edison came well before the six-year limit expired.

The Supreme Court agreed.

“So long as a plaintiff’s claim alleging breach of the continuing duty of prudence occurred within six years of suit, the claim is timely,” Justice Breyer wrote.

In the original District Court decision, Judge Stefan Wilson ruled the plaintiffs did not meet a burden to show that specific changes in circumstances occurred to require Edison fiduciaries to undertake a full due-diligence review of the funds added in 1999.

In upholding that decision, the 9th Circuit ruled that Edison fiduciaries had no obligation to review the prudence of the investments, because circumstances had not changed to require a review. The 9th Circuit also determined that  “characterizing the mere continued offering of a plan option as a subsequent breach would render” the statute of limitations meaningless, and could expose fiduciaries to liability for decisions made decades ago, according to Justice Breyer’s analysis of the lower court’s ruling.

But the 9th Circuit “did not recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances,” wrote Breyer.

Citing previous courts’ consideration of trust law when determining ERISA claims, Breyer also wrote that a trustee “has 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.”

Furthermore, a trustee must “systematically consider all the investments of the trust at regular intervals” to ensure appropriateness, argued Breyer.

In establishing a fiduciary’s ongoing duty to monitor investments, the High Court did not issue an opinion on the specific scope of Edison’s fiduciaries to review and monitor the investments in question.

The case has been remanded to the 9th Circuit Court, which has been instructed to reconsider plaintiffs’ claims, recognizing the importance of “analogous trust law,” according to the Supreme Court’s brief.

— Check out Workers Lose $24 Billion a Year in Unclaimed 401(k) Company Matches on ThinkAdvisor.