Important Supreme Court ERISA Decision on Fiduciary Duties Concerning 401(k) Plan Costs Assessed to Participants

In 2007, employee participants of the Edison 401(k) Savings Plan filed a plaintiff class action against the employer plan sponsor, Edison International, and several fiduciaries of the Plan for damages resulting from alleged breaches of their fiduciary duties under ERISA. [Tibble v. Edison, 2015 WL 2340845.] The alleged fiduciary breaches involved the defendants’ 1999 selection of three mutual funds to be added to the 401(k) Plan’s menu of funds from among which the participants could self-direct the investment of their accounts under the Plan. The plaintiff class had also sued for the allegedly imprudent 2002 selection of another three mutual funds added to the 401(k) Plan for the same purpose.

The participant class in Tibble argued that the defendant fiduciaries acted imprudently in their choice of six retail-class mutual funds selected for the 401(k) Plan because other institutional-class mutual funds were also available to the Plan at much lower management fees to be charged against the participants’ 401(k) accounts. This apparent indifference of the fiduciaries in choosing high-cost funds over virtually identical lower-cost funds imposed substantial and avoidable costs on the participants, and constituted a breach of that fiduciary duty owed to participants under ERISA.

The federal trial and appellate courts below ruled that the plaintiff participants were time-barred as to the 1999 selection of funds because of the six-year statute of limitations under ERISA. In the view of the trial court, there was no substantial change in circumstances during this six-year period such as to cause the fiduciaries to go back and review their earlier selection of the more expensive retail-class funds, and then convert those to the alternative lower-priced institutional class funds. The Ninth Circuit Court of Appeals affirmed the ruling of the trial court that suit on the 1999 selection of funds was time-barred. The participants appealed to the U.S. Supreme Court.

The Supreme Court agreed to take the Tibble case, heard oral argument on February 24th, and released its ruling on May 18th. The Supreme Court held for the plaintiff class of plan participants, and unanimously reversed the adverse rulings of the lower courts. The Court opined that the participants’ claim of fiduciary breach in the employer’s 1999 selection of the higher-cost funds was not barred by ERISA’s six-year statute of limitations. Rather, Edison and its Plan fiduciaries had a continuing duty to monitor and remove imprudent plan investments from the time of their initial selection in 1999 for as long as the funds were held by the Plan. The alleged failure of the fiduciaries to exercise a continuing duty of oversight of Plan funds since 1999 was not time-barred as having occurred within six-years of suit being brought, and so the claim was timely, the Court ruled.

In response to Justice Breyer’s questioning of defendants’ legal counsel during oral argument before the Supreme Court, it was conceded that ERISA requires continuous monitoring by Plan fiduciaries after initial selection of those 401(k) investment options under the Plan. The Court’s written opinion picked up on that admission, pointing out: “The parties now agree that the duty of prudence involves a continuing duty to monitor investments and remove imprudent ones under trust law.” That the justices of the Supreme Court were able to reach a unanimous decision with so little difficulty came as no surprise to those who had been following the case.

Although finding for the plaintiffs regarding the 1999 claims, the Supreme Court did not prescribe exactly what kind of review a fiduciary should undertake in selecting or continuing to monitor plan investments. That determination was left to be developed by the lower courts on remand, and to those other courts which will decide a substantial number of similar 401(k) cases now pending, in addition to those yet to be brought by aggrieved participants of other plans.

Regarding those three other retail-class funds added to the Edison 401(k) Plan in 2002, the trial court had already found a fiduciary breach by Edison for inclusion of those higher-priced alternatives in the Plan. The District Court, in ruling for the participants on the 2002 claims, wrote that the defendants had “not offered any credible explanation” for offering retail-class, i.e., higher-priced mutual funds that “cost the Plan participants wholly unnecessary [administrative] fees.” Not only were those retail funds more costly to the participants, but they also included revenue-sharing provisions to allow the funds to collect fees out of fund assets for disbursement to the 401(k) Plan’s service providers: An additional assessment against the participants’ accounts under the Plan.

Some of the more notable quotes from Justice Breyer’s opinion in Tibble that will guide future courts in their determination under ERISA whether company plan sponsors, trustees and other fiduciaries have adequately discharged their duty to monitor 401(k) investment options and costs:

  • “An ERISA fiduciary must discharge his responsibility ‘with the care, skill, prudence and diligence’ that a prudent person ‘acting in a like capacity and familiar with such matters’ would use.”
  • “Under trust law, 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.”
  • “The trustee must ‘systematically consider all the investments of the trust at regular intervals’ to ensure that they are appropriate.”
  • “Managing embraces monitoring and … a trustee has continuing responsibility for oversight of the suitability of the investments already made.”
  • “When the trust estate includes assets that are inappropriate as trust investments, the trustee is ordinarily under a duty to dispose of them within a reasonable time.”

None of these fiduciary principles of ERISA are new but rather represent long settled trust law. Their importance under the Tibble case is in their express application to employer selection of those mutual funds made available for participant direction under company-sponsored 401(k) plans, and the continuous duty of fiduciaries under ERISA to monitor and manage those investments for so long as they remain part of a 401(k) plan.

Another important consequence of the Tibble case is that in the selection and retention of funds in a 401(k) plan, those resulting management and administrative costs imposed on participants must be analyzed by plan fiduciaries, and less expensive funds substituted when “appropriate”. Going forward, employer sponsors and other fidicuaries of 401(k) plans need to be appropriately circumspect in imposing any objectionable and avoidable cost, expense or fee on participants resulting from their choice or retention of funds for a plan. The prime directive of plan fiduciaries under ERISA is and always has been to act solely in the interest of the plan’s participants and beneficiaries.