Compliance

Supreme Court Reaches Decision in Tibble v. Edison

A decision from the Supreme Court of the United States seems to solidify the “ongoing duty to monitor” investments as a fiduciary duty that is separate and distinct from the duty to exercise prudence in selecting investments for use on a defined contribution plan investment menu.

By John Manganaro editors@strategic-i.com | May 18, 2015
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The decision is the latest chapter in the long-running dispute between utility company Edison International and participants/beneficiaries in the Edison 401(k) Savings Plan. The initial suit was filed in 2007, when petitioners argued that Edison International had violated its fiduciary du­ties with respect to three mutual funds added to the plan in 1999 and three mutual funds added to the plan in 2002. In short, the investments in question were offered to the plan participants as higher-priced retail share classes when cheaper institutional share classes could easily have been obtained.

In subsequent years the case climbed all the way to the Supreme Court. The plaintiffs argued with success that Edison fiduciaries acted imprudently by offering higher priced retail-class mutual funds as plan investments when materially identi­cal but lower priced institutional-class mutual funds were available. But be­cause the Employee Retirement Income Security Act (ERISA) requires a breach of fiduciary duty complaint to be filed no more than six years after “the date of the last action which consti­tutes a part of the breach or violation” or “in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation (29 U. S. C. §1113),” the district court hearing the case held that the petitioners’ complaint as to the three 1999 funds was untimely because they were included in the plan more than six years before the complaint was filed. 

According to the district court, “the circumstances had not changed enough within the six-­year statutory period to place respondents under an obligation to review the mutual funds and to convert them to lower priced institutional-class funds.” The 9th U.S. Circuit Court of Appeals subsequently affirmed, concluding that petitioners had not established a change in circumstances that might trigger an obligation to conduct a full due diligence review of the 1999 funds within the six-year statutory period.

Now, the Supreme Court has determined the 9th Circuit erred “by applying §1113’s statutory bar to a breach of fiduciary duty claim based on the initial selection of the investments without considering the contours of the alleged breach of fiduciary duty.” This resulted in the Supreme Court remanding the case back to the appellate court, “to consider petitioners’ claims that respondents breached their duties within the relevant six-year statutory period under §1113, recognizing the importance of analogous trust law.”

As explained in the text of the Supreme Court decision, ERISA’s fiduciary duty is “derived from the common law of trusts,” especially as found in a previous case known as Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc. (472 U. S. 559, 570), which provided that an investment trustee has 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.