SCOTUS decision opens door to more 401(k) lawsuits

The U.S. Supreme Court issued a decision Monday that could have far-reaching implications for how long a retirement plan participant has to sue an employer for breach of fiduciary duty in a 401(k) plan. In Tibble v. Edison International, the Court ruled that plan fiduciaries have 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.”

The lower courts had ruled that Glenn Tibble and the other petitioners in the case waited too long to file a complaint claiming that their employer, 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 found that the 9th Circuit Court of Appeals erred when it wouldn’t allow retirement plan participants to sue for a fiduciary breach on three of the six investments in the plan because a “fiduciary must discharge his responsibilities with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use.”

Also see: DOL primed to expand 401(k) oversight through Tibble v. Edison

“They found that it is their duty to regularly or continuously monitor investments in retirement plans, but left the framework of what the duty to monitor is” to the lower courts, says Michael Graham, a partner and co-chair of the ERISA Litigation Affinity Group at international law firm McDermott Will & Emery in Chicago. “That leaves a lot of uncertainty. It gives incentive and impetus for plaintiff lawyers to file more lawsuits on the prudence of investments.”

He added that on the employers’ side, “it definitely increases the administrative burdens on plans in that employers are now going to need to determine some sort of framework or benchmarks they can document that they are regularly and continuously monitoring investments and fees.”

Because the Supreme Court didn’t determine what constitutes “regular or continuous,” it is up to the lower courts to determine if that means an annual, quarterly or minute-by-minute review of plan investments.

“The Supreme Court's failure to articulate any standards for the lower courts to use in evaluating 'failure to monitor' claims means we will likely see conflicting rulings by lower courts regarding the factors that would trigger a duty to review investments, how frequently investments must be reviewed in the absence of specific triggering events and how thorough the review must be," says David C. Olstein, executive compensation and benefits counsel with law firm Skadden.

Also see: 401(k) suits draw employee attention to fees, fiduciary duty

And, says Graham, is it sufficient for employers to rely on the advice of their investment advisers or does the employer’s investment committee have to determine the prudence of investments?

“I think it will be interesting to see how this impacts large plans but also small and mid-size plans as well because there is no differentiation on duty [to monitor],” Graham says. “It could be an onerous duty for smaller employers/smaller plans to benchmark processes and make sure they are following them because of administrative manpower. Large companies have more people available. It will be interesting to see how this impacts the whole retirement plan realm vis-à-vis these duties.”

It wasn’t a surprise the court ruled in this way, Graham adds, but most people with a stake in the decision were hoping the justices would delve more deeply into what that ‘duty to monitor’ means, he says.

Jamie Fleckner, partner and chair of the ERISA litigation practice at Goodwin Procter LLP in Boston, agrees that it wasn’t a surprising decision, but that the court “left open the real critical question that was the subject of a good deal of oral argument – namely, what does ‘duty to monitor’ entail? They expressly stated they weren’t providing any guidance on that. Fundamentally, they’ve left open the real issue.”

Because of the open-ended nature of the decision, Fleckner said that the lower courts could reaffirm their original decision and not allow the plaintiffs to sue regarding the three funds that were outside of the six-year ERISA window or they could “open up the record and could have new testimony or conceivably new documents that could change the outcome to the extent there was a unanimous decision that the case could proceed. There is a chance there could be a different outcome. If the Supreme Court had affirmed the 9th Circuit decision, there would be no chance of a different outcome. Now the door’s open to the possibility of a different outcome.”

He adds that he doesn’t think the Supreme Court said anything that would prompt the 9th Circuit to render a different decision than it already has.

And although the ruling is likely to result in additional litigation, says Olstein, one aspect of the Court's decision can be seen as pro-defendant. "By recognizing that a fiduciary's duty to monitor investments and remove imprudent investments is separate and apart from the duty to exercise prudence in selecting investments, the Supreme Court implicitly rejected 'continuing breach' theories of recovery that would allow a plaintiff to recover investment losses incurred more than six years prior to the filing of a fiduciary breach claim," he says.

Paula Aven Gladych is a freelance writer based in Denver, Colorado.

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