ERISA Supreme Court Ruling

The U.S. Supreme Court recently found that employers cannot shorten the time period over which plan participants can sue for fiduciary breach solely by posting information online or sending it in the mail. In most cases, retirement plan participants have six years to sue for fiduciary breach. The window is shortened to three years from the date the participant had "actual knowledge" of the fiduciary violation. Here, plan participants alleged their employer breached their fiduciary duties by making poor investment decisions. The employercountered that too much time had passed, because the participant had been sent all of the information that would give them notice of the violation more than three years ago. The Supreme Court found that “actual knowledge” was lacking here because plan participants testified under oath that they did not recall reading the information and did not have actual knowledge of the violation.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about this new precedent.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: Anyone with a 401(k) or employer-sponsored retirement plan knows that they are constantly receiving information about the plan. Sifting through all of this material to determine what is relevant takes time and energy that most of us are unwilling to devote—and we shouldn’t have to. Requiring the participants to have actual knowledge that a violation occurred to trigger the shorter limitations period is completely reasonable given the realities of these types of plan disclosures.

Byrnes: Giving retirement plan participants six years to sue their employers and plan sponsors for making poor investment decisions is a blow that will trickle down to the plan participants themselves. Confirming that this “actual knowledge” standard is what will apply to shorten the limitations period is yet another piece in the puzzle toward increasing fiduciary litigation—and discouraging employers from taking on the burden of offering retirement plan options to employees in the first place.

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Bloink: We don’t have a strong fiduciary rule in place to give comprehensive protection to investors. In many cases, retirement plan investments constitute the bulk of a person’s assets—if not their entire net worth. This ruling will give plan sponsors and employers an incentive to make sure that important information is laid out clearly rather than being hidden within volumes of complex material.

Byrnes: The details of how “actual knowledge” is established are lacking in this opinion, creating a gray area that is only going to increase 401(k) fiduciary litigation and increase the cost of these plans all-around. Can a participant read a notice sent by the plan sponsor, forget about it and reasonably claim that they do not have actual knowledge?

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Bloink: The bottom line is that the supreme Court ruling is completely reasonable. “Actual knowledge” means “actual knowledge”—the participants actually had to know about the violation. A primary purpose of having a limitations period is to incentivize the swift resolution of cases like these. If the employee did not know about the violation—as it’s reasonable to assume they would not absent some executive role—they have no way of protecting their rights.

Byrnes: Based on this decision, the shorter three-year limitations period is essentially nullified. Plan participants can always say that they don’t remember reading the information or that they didn’t understand the information. It’s opening the door to even more widespread litigation and, as such, is something that Congress should take steps to clarify within ERISA itself.