Supreme Court Revives Employees’ 401(k) Suit Against ERISA Fiduciary

Supreme Court Revives Employees’ 401(k) Suit Against ERISA Fiduciary

Unanimous decision says participants aren’t time barred from suing employer for failure to exercise prudence in monitoring investments

In a 9-0 decision, the U.S. Supreme Court ruled today that Edison International (Edison) employees, who were beneficiaries of the Edison 401(k) Savings Plan (the Plan), could sue their employer for breach of fiduciary duties.  In Tibble v. Edison International, et al., Slip Op. No. 13-550 (May 18, 2015), Justice Stephen Breyer delivered a unanimous decision that ruled that the plan participants had filed their lawsuit in a timely fashion.  The specific issue the Supreme Court addressed was “whether a fiduciary’s allegedly imprudent retention of an investment is an ‘action’ or ‘omission’ that triggers the running of the 6-year limitations period.”  A California district court and the U.S. Court of Appeals for the Ninth Circuit had previously held that the plan participants’ claims were untimely because they didn’t establish a change in circumstances that might trigger an obligation to review certain investments within the six-year statutory limitations period.  The Supreme Court disagreed, holding that a trustee has a continuing duty—separate and apart from the duty to exercise prudence in its investment selection—to monitor and remove imprudent trust investments.

The Plan Participants’ Claims

In 2007, several plan participants filed a lawsuit on behalf of the beneficiaries of the Plan against Edison, alleging breach of fiduciary duties.  They sought to recover monetary damages for losses, in addition to injunctive and equitable relief. 

The Plan is a defined-contribution plan, in which each participant’s benefits are limited to the value of their own investment account.  The value of each account is determined by the market performance of the contributions, less expenses.  Management fees and administrative expenses can significantly reduce the value of an investment account in a defined-contribution plan.

Edison added three mutual funds to the Plan in 1999 and three more in 2002.  The Plan participants claimed that Edison acted imprudently by offering high priced retail class mutual funds, when identical, less expensive institutional class mutual funds (with lower administrative fees) were available.  The participants argued that that such a large institutional investor like the Plan had access to lower priced institutional class mutual funds that weren’t available to a retail investor.  As such, Edison wasn’t acting prudently in offering the six more expensive retail class mutual funds, when it could have offered the participants the same six funds at a lower price offered to institutional investors like the Plan.

The Lower Court Rulings

In 2010, a district court in California agreed with the Plan participants that with respect to the funds added to the Plan in 2002, Edison failed to exercise “the care, skill, prudence and diligence under the circumstances” that the Employee Retirement Income Security Act (ERISA) demands of fiduciaries.  However, the district court held that with regard to claims related to the three funds added to the Plan in 1999, those claims were untimely, because the complaint was filed more than six years after the alleged breach.  The district court allowed the Plan participants to argue that the complaint was timely because the funds underwent significant changes within the 6-year statutory period that should have prompted Edison to perform a full due diligence review and convert the higher priced retail class mutual funds to the lower priced institutional class mutual funds.  After considering the Plan participants’ arguments, however, the district court found that they didn’t meet their burden of showing that a prudent fiduciary would have taken a full due diligence review of those funds as a result of the alleged circumstances and convert the funds to the lower priced ones.  The Ninth Circuit affirmed.

The Supreme Court’s Ruling  

The Supreme Court began its analysis with Section 1113 of the U.S. Code, which imposes a 6-year statute of limitations on claims for a fiduciary’s breach of duty.  The 6-year limitation applies 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.” 

While the Ninth Circuit correctly looked at whether the last action that constituted the breach or violation occurred within the relevant 6-year period, it erred when it concluded that “only a significant change in circumstances could engender a new breach of a fiduciary duty” (emphasis in original).  The Supreme Court acknowledged that the district court was correct to have entertained the possibility that significant changes that could occur during the limitations period might require a full due diligence review of the funds. 

The Supreme Court stated:

We believe the Ninth Circuit erred by applying a statutory bar to a claim of a breach or violation of a fiduciary duty without considering the nature of the fiduciary duty.  The Ninth 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 circumstance.

The Supreme Court continued to note that an ERISA fiduciary has an obligation to use care, skill, prudence and diligence that a prudent person in a similar capacity and familiar with such matters would use.  Turning to trust law as a guide, the Supreme Court stated that separate from a trustee’s duty to select prudent investments, a trustee also has a continuing duty to monitor trust investments.  Relying on case law, Bogert Law of Trusts and Trustees, the Uniform Prudent Investor Act, Scott and Ascher on Trusts and The Restatement (Third) of Trusts, the Supreme Court emphasized a trustee’s duty to systematically consider and monitor all investments of a trust at regular intervals to make sure that the investments are appropriate.  “In short,” said the Supreme Court, “under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.”  So long as the alleged breach of the continuing duty occurred within six years of the complaint being filed, the claim is timely.

Accordingly, said the Supreme Court, the Ninth Circuit erred by applying the 6-year statute of limitations based on the initial selection of the three funds without looking at the scope of the alleged breach. 

“The parties now agree that the duty of prudence involves a continuing duty to monitor investments and remove imprudent ones under trust law,” noted the Supreme Court.  But, the parties still disagreed about the scope of that responsibility.  Declining to rule on the scope of the duty, the Supreme Court vacated the Ninth Circuit’s judgment and remanded the case for the Ninth Circuit to consider the participants’ claims that Edison breached its fiduciary duty within the 6-year period.  Moreover, it left for the Ninth Circuit to consider the issue of whether the participants also forfeited raising the claim that Edison committed new breaches of the duty of prudence by failing to monitor the investments and remove imprudent ones.

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