No matter how the U.S. Supreme Court rules in Tibble v. Edison International, one thing is clear: employers will need to be more vigilant about the investments they choose for their company-sponsored 401(k) plans in the future to avoid litigation.
The Supreme Court was expected to decide whether Glenn Tibble and the other petitioners in the case waited too long to file a complaint claiming that Edison International breached its fiduciary duty under the Employee Retirement Income Security Act. At issue were higher cost retail-class shares of six mutual funds that were offered to the company’s 401(k) participants when lower-cost institutional shares were available. The district and appeals courts in the case ruled that the plaintiffs could pursue breach of fiduciary duty claims in the case of three of the funds but that they waited too long under ERISA’s six-year statute of limitations to file a claim regarding the other three funds.
The Supreme Court was supposed to decide when the clock starts ticking on the six-year statute of limitations required by ERISA. The district court basically ruled that the six-year clock begins ticking the moment the funds are added to a portfolio and only restarts if a major change in circumstances is recorded.
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“The interesting thing looking at the argument [on Feb. 24] was that the court didn’t address that issue and it was the only issue before it,” says Michael Graham, a partner and co-chair of the ERISA Litigation Affinity Group at international law firm McDermott Will & Emery in Chicago.
Instead, the court focused its attention on duty to monitor fees and investments, generally by investment committees and plan administrators of 401(k) plans.
In its questioning, the justices attempted to determine what is a fiduciary’s duty to monitor and what standards should be followed.
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“It is unclear where the court may go with this,” says Graham. There was a faction of the court, including Justice Sonia Sotomayor, who felt that the decision about duty to monitor should be handled by the lower courts, but other justices felt they should address it. “It is a matter of when the duty to monitor kicks in and what does it mean,” Graham says.
If the petitioners are successful, it will mean more litigation to determine what the duty to monitor is and when an investment committee or plan fiduciary breaches that duty by not properly monitoring the investments they selected.
“It could be a slippery slope for employers,” he said.
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They would have to decide what constitutes proper or reasonable monitoring: every quarter, annually or constantly, he added.
“That slippery slope could create an onerous burden on administrators in monitoring investments that were previously selected,” says Graham.
If the Supreme Court rules in favor of the respondents, it will give employers “certainty about when stale claims can be brought, but it will be a wake-up call for employers to make sure they have the benchmarks and processes in place to monitor investments and fees going forward to stay away from litigation having to do with their activities.”
The court’s decision will be issued before the term ends on June 30.
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“There are a lot of these claims out there and not a lot of guidance out there about what is expected on duty to monitor vs. what are good steps to maintain, good processes to maintain so you can hopefully avoid getting into these types of litigation,” says Graham.
The initial class action complaint was filed on Aug. 16, 2007, in U.S. District Court for the Central District of California against defendants Edison International, Southern California Edison Company, the Southern California Edison Company Benefits Committee, the Edison International Trust Investment Committee, the secretary of the SCE Benefits Committee, SCE’s vice president of human resources and the manager of SCE’s human resources service center.
Paula Aven Gladych is a freelance writer based in Denver, Colorado.
