Supreme Court Reminds Fiduciaries That Regular Monitoring of Investments is RequiredPublications - Client Alert | May 19, 2015
As expected, in a very short opinion, the U.S. Supreme Court unanimously vacated a Ninth Circuit ruling and held that plan fiduciaries must regularly monitor plan investments. Previously, the Ninth Circuit had held that claims against fiduciaries over allegedly imprudent 401(k) plan investments were time-barred if the claims were made more than six years after the initial decision to select the investments.
Edison International sponsored a 401(k) plan. The Plan’s investment committee selected a variety of mutual funds for the Plan. The funds selected by the investment committee were retail-class funds, which charged higher fees than the comparable institutional-class funds.
In 2007, participants in Edison’s 401(k) Plan sued Edison International, along with the individuals and committees who administered the Plan. The participants alleged that Plan fiduciaries violated ERISA by: (1) using revenue sharing to offset plan administration costs, (2) selecting certain high-cost mutual funds, and (3) selecting retail mutual funds when lower-cost mutual funds were available.
The District Court originally held that: (1) revenue sharing was permitted by the Plan, (2) claims concerning the high-cost mutual funds were barred because the claims were filed after the expiration of the six-year statute of limitations period, and (3) the fiduciaries’ decision to select retail-class funds was imprudent. The Ninth Circuit Court of Appeals affirmed the decision of the District Court.
U.S. Supreme Court Decision
In their appeal to the Supreme Court, the participants asked the Court to determine whether ERISA’s six-year statute of limitations period begins on the date a fiduciary initially selected the higher-cost mutual fund options or whether the on-going offering of such funds constituted a “continuing” fiduciary breach, thereby extending the period in which they could file suit.
The Supreme Court held that the Ninth Circuit Court of Appeals mistakenly applied ERISA’s six-year statute of limitations solely on the initial selection of the mutual funds without considering the nature of the alleged breach of fiduciary duty. The Supreme Court said that, under trust law, “a trustee has a continuing duty to monitor trust investments and remove imprudent ones.” This duty “exists separate and apart from the trustee’s duty to exercise prudence in selecting investments.”
The Court went on to say “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.”
Next Steps/Recommended Action
As a result of this case, to the extent plan fiduciaries are not already doing so, we recommend retirement plan fiduciaries consider taking the following action:
- Regularly monitor the investments within the plan, comparing them to their peers, benchmarks, and other criteria regularly used by the fiduciaries
- Regularly confirm the investments previously selected for the plan are still appropriate (i.e., consider whether a lower‑share class is available, the investment’s style has shifted, or the investment continues to provide solid diversification when compared to the other investment options in the plan)
- Document all decisions with respect to the selection, monitoring, removal and retention of plan investments
If you would like any assistance in establishing, documenting or evaluating your process for monitoring the investment options under your plan or if you have any questions related to this decision, please contact your Kutak Rock attorney or a member of the Kutak Rock Employee Benefits Practice Group.