Supreme Court: Plan Fiduciaries Have a Continuing Obligation to Monitor Investment Prudence

WARNING: Do not read this while operating machinery or driving, if you are pregnant, or might become pregnant.   Yes, it's an ERISA case.  But it will keep your plan administrator up at night.

The Supreme Court considered whether claims against a retirement plan's fiduciaries were time barred. The plaintiffs claimed that the value of their retirement plan accounts decreased because the plan purchased "retail" mutual funds, rather than "institutional" class funds, which have lower expense ratios.

The Ninth Circuit held that the claims were untimely under ERISA's six-year statute of limitations.  The court of appeals believed the statute of limitations ran because the administrator selected the more expensive funds more than six years before the plaintiffs filed the lawsuit.

The Supreme Court, unanimously, reversed.  The high Court found that the claims were timely because they implicated whether the trustees prudently managed the funds during the limitations period, by monitoring whether the investments were adequate, or by failing to do so.  As such, the Court decided that regardless of the timing of the selection of the funds, the failure to adequately monitor the investments could form the basis of a timely claim.  Here's the money quote:

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 circumstances. Of course, after the Ninth Circuit considers trust-law principles, it is possible that it will conclude that respondents did indeed conduct the sort of review that a prudent fiduciary would have conducted absent a significant change in circumstances. 

An ERISA fiduciary must discharge his responsibility “with the care, skill, prudence, and diligence” that a pru- dent person “acting in a like capacity and familiar with such matters” would use. §1104(a)(1); see also Fifth Third Bancorp v. Dudenhoeffer, 573 U. S. ___ (2014). We have often noted that an ERISA fiduciary’s duty is “derived from the common law of trusts.” Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U. S. 559, 570 (1985). In determining the con- tours of an ERISA fiduciary’s duty, courts often must look to the law of trusts. We are aware of no reason why the Ninth Circuit should not do so here.

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.

So, employers must ensure that the plan administrators are adequately monitoring investment options to satisfy their fiduciary duties.  Poor management and supervision claims likely will not grow stale over time given this ruling.

The case is Tibble v. Edison International and the opinion is here.