Plan Fiduciaries’ Duty to Monitor Investment Options

Posted on June 1, 2015

United States Supreme Court in Tibble v. Edison International, recently confirmed the position of the Department of Labor (DOL) and most other authorities that ERISA fiduciaries have a “continuing duty” to monitor investment options. The Court also held that plan participants have six years from the date of an alleged violation of the duty to monitor to file a lawsuit against the plan’s fiduciaries. This ruling, while not unexpected, is certain to encourage more litigation over the prudence of holding on to specific plan investment options in 401 (k) and other participant directed plans.

Participants and beneficiaries in the Edison plan brought suit in 2007 alleging that plan fiduciaries acted imprudently by offering six retail-class mutual funds when identical, lower-priced institutional-class funds were available. The more expensive funds reduced the net investment returns the participants and beneficiaries were able to obtain. Three of the funds were added to the plan in 1999 and three were added in 2002. The lower courts held the six-year statute of limitations on bringing an action for fiduciary violations expired as to the funds added in 1999, finding the action that started the statute running was the initial addition of the funds to the plan’s investment line-up.

Before the Supreme Court all parties agreed there is a duty to monitor but disagreed how and when that duty arises. The fiduciaries argued that the duty to monitor is triggered only if there is a significant change in the circumstances surrounding an investment, which would require a prudent fiduciary to conduct a renewed, in-depth review of it. The Supreme Court rejected this approach.

The Supreme Court concluded that the duty to monitor, like most fiduciary duties under ERISA, is derived from the common law of trusts. It stated:

[U]nder trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. A plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones. In such a case, so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely.

This duty is separate and distinct from the duty to prudently select investments.

The Supreme Court left it to the lower courts to determine what kind of investment review and monitoring is sufficient. That, as they say, is now the heart of the issue.

The DOL and most authorities have long advocated having a systematic process to periodically review a plan’s investment alternatives and make changes when necessary. The Supreme Court has confirmed that that to do any less leaved plan fiduciaries vulnerable to liability for poor performing funds or funds with excessive expenses. The importance of an Investment Policy Statement to guide plan fiduciaries cannot be overstated. This review should be carried out at least annually and probably more often, quarterly or semi-annually.

Second, where an institutional class is available for a particular mutual fund, it is hard to imagine a scenario where the failure to choose that class with its cheaper expenses will be considered prudent. The ruling puts pressure on plan sponsors and their advisors to choose funds with the lowest fees, perhaps even at the expense of investment performance.

Finally, by creating in effect a rolling statute of limitations because of the continuing monitoring duty, lawsuits over imprudent fund selections are bound to proliferate.

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