Does ERISA time-bar claims brought against fiduciaries (for a breach of the duty of prudence) if the initial breach occurred more than six years before filing, but allegedly harmed the beneficiaries within the last six years?
In this case, the Supreme Court will determine whether the ERISA’s six-year filing window prohibits a claim that 401(k) plan fiduciaries breached their duty of prudence by offering higher-cost mutual funds to plan participants, despite identical lower-cost mutual funds being available, when fiduciaries initially chose the higher-cost mutual funds more than six years before the claim was filed. A group of employee-beneficiaries argue that plan fiduciaries have an “ongoing” duty of prudence under ERISA and the failure to remove an imprudent investment gives rise to a new six-year period. Edison International, the employer, counters that case should be dismissed because the record does not reflect the question that the Court granted certiorari for; or, in the alternative, that the judgment below should be affirmed because there is no reversible error. The resolution of this case could have implications concerning the future cost of ERISA-governed benefits plan, and the scope of fiduciary duties.
Questions as Framed for the Court by the Parties
Whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U.S.C. § 1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed?
Respondent Edison International (“Edison”) is a holding company with interests in electrical utilities and other energy concerns, with a full-time workforce of over 14,000 employees. To assist its employees, Edison, through its related benefits and investment committees, offers a 401(k) Savings Plan (the “401(k) Plan”). Originally, the 401(k) Plan consisted of six possible investment options. However, in 1999, the 401(k) Plan was amended to include “ten institutional or commingled pools, forty mutual fund-type investments, and an indirect investment in Edison stock known as a unitized fund.” The mutual funds, referred to as retail-class mutual funds, had higher administrative fees than other institutional-class funds that were available. Furthermore, the addition of the retail-mutual funds created revenue sharing. The revenue sharing allowed certain mutual funds to collect “fees out of fund assets and disburse them to the 401(k) Plan’s service provider.” Accordingly, Edison collected “a credit on its invoices from that provider.”
Petitioners Glenn Tibble, William Bauer, and several other (collectively, “Tibble”) are past and present employees and participants in the 401(k) Plan. In 2007, Tibble, acting on behalf of Edison’s entire eligible workforce, sued Edison in the U.S. District Court for the Central District of California (“district court”) under the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA allows plan participants to challenge the prudence of acts by plan fiduciaries within six years of the alleged breach. ERISA’s duty of prudence obligates investment fiduciaries to make investments “with the care, skill, prudence, and diligence” that a “prudent” investor with the same capacity and in a similar situation would utilize. Tibble alleged that Edison breached its duty of prudence by offering higher-fee retail-class mutual funds as plan investments when lower-fee institutional-class funds were available and that the inclusion of higher-fee retail-class mutual funds was a “continuing violation of ERISA.”
The district court granted summary judgment for Edison. The court noted that Edison initially chose the higher-fee retail-class mutual funds more than six years before the claim was filed and that, under ERISA, those claims were time-barred. Tibble appealed to the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”).
Before the Ninth Circuit, Tibble argued that the district court erred in its interpretation of timeliness under ERISA’s statute of repose provision. Specifically, Tibble argued a “continuing violation theory” where Edison and the other fiduciaries continually breached their duty of prudence by failing to identify alternative fund options and offer available lower-cost institutional-class investments through 2007; consequently, the last breach would be in 2007, and Tibble thus filed within the ERISA’s six-year statute of limitations.
The Ninth Circuit, in affirming the district court’s ruling, rejected Tibble’s “continuing violation theory” and found that Tibble’s claims arose more than six years before the filing; thus, the claims were barred by ERISA’s six-year limitation. Afterwards, Tibble petitioned the Supreme Court, which granted certiorari, asking the court to clarify the meaning of the language in ERISA’s six-year filing limitation.
Under ERISA, a beneficiary’s claim alleging a breach of a fiduciary’s duty must be filed within six years after “the date of the last action which constituted a part of the breach or violation” or “in the case of an omission the latest date the fiduciary could have cured the breach or violation.” In this case, Tibble maintains that a fiduciary’s failure to conduct a periodic review and remove imprudent investments, arguably required by ERISA’s duty of prudence, commences a new six-year period. Edison, on the other hand, contends that the Court should either dismiss this case as improvidently granted because the record does not present the facts for the Court’s consideration, or affirm the lower courts’ judgment.
DOES ERISA'S DUTY OF PRUDENCE IMPOSE A FIDUCIARY OBLIGATION TO CONDUCT PERIODIC REVIEWS?
According to Tibble, “ERISA’s duty of prudence imposes an obligation on plan fiduciaries such as [Edison] to review the prudence of plan investments periodically and to remove imprudent investments.” In this case, Tibble contends that because lower-cost, institutional-class funds with equal investment performance were available but were not added to the 401(k) plan, Edison breached its duty of prudence by adding higher-cost, retail-class mutual funds. Additionally, Tibble argues that the requirement of monitoring and reviewing funds for a defined-contribution plan is not limited to circumstances where “significant changes” for the fund have occurred. Rather, Tibble asserts, periodic reviews of investment funds is required; thus although “market changes” may require that the trustee remove funds between review periods, the requirement to survey each fund for market changes does not eliminate the trustee’s obligation to periodically monitor each investment to satisfy his or her duty of prudence. Tibble suggests that background principles of trust law, while not necessarily dispositive, support this obligation (to conduct periodic reviews) within the duty of prudence.
On the other hand, Edison argues that requiring periodic review of all investments within a contribution plan is not required to meet the duty of prudence. Rather, according to Edison, the foundations of trust law dictate that a review of the investments is required only when adding an investment to the benefit plan or if the investment has significantly changed in character, which would typically manifest in a substantial drop in price. Furthermore, Edison notes that neither Department of Labor guidance documents nor case law supports the proposition that fiduciaries must engage in periodic, exhaustive reviews of all investments under ERISA. As a result, Edison urges the Court to reject an affirmative duty on fiduciaries to conduct periodic reviews.
DOES THE FAILURE OF A FIDUCIARY TO REVIEW AND UPDATE ITS PLAN INITIATE THE BEGINNING OF A NEW LIMITATIONS PERIOD?
According to Tibble, “[e]ach breach of a fiduciary’s obligation to review investments periodically and remove imprudent ones starts the running of a new limitations period for claims arising out of that breach.” Moreover, Tibble asserts that according to the text, it does not matter whether each breach is a separate breach or part of a breach. Therefore, Tibble argues, Edison’s failure to remove the higher-cost funds over six years of management of the retirement fund should constitute a “breach” giving “rise to [Tibble]’s claim.”
On the other hand, Edison maintains that contrary to Tibble’s assertions, the failure to remove imprudent investments does not always renew a limitations period. Edison argues that “the process for monitoring and removing 401(k) lineup options has never been understood as equivalent to the process for deciding which options should be included in the first place.” Once again, Edison maintains that neither trust law nor ERISA guidance materials or case law impose a duty on fiduciaries to periodically conduct in-depth reviews of investments. Consequently, Edison submits that since Edison used “a state-of-the-art monitoring process . . . no deeper, full diligence review was required.” It follows, Edison continues, that Edison’s failure to remove the allegedly imprudent investment did not initiate the beginning of a new limitations period under ERISA.
IMPROVIDENT GRANT OF CERT
Edison argues that the Supreme Court should dismiss the writ as improvidently granted because the facts of the case fail to give rise to the actual question presented to the Court. First, Edison contends that the statute of repose is not at issue here; instead only issues of fact are disputed between Tibble and Edison regarding “whether Edison in fact breached their monitoring duty.” Edison asserts that the district court resolved this factual issue in favor of Edison and, since Tibble failed to contest the district court’s findings of fact and the “Court did not grant certiorari to review them,” Edison asserts that the Court should dismiss the writ. Second, Edison argues that the Ninth Circuit correctly rejected Tibble’s continuing violation argument and that Tibble’s current theory now is equivalent to that theory. Thus, Edison maintains that the case does not merit review by the Supreme Court and should be dismissed as improvidently granted.
Nevertheless, Tibble generally disagrees with Edison. First, Tibble maintains that the district court’s and Ninth Circuit’s findings provide a basis for the inference that Edison did violate their duty of prudence. According to Tibble, in the lower court proceedings Tibble adequately presented evidence of Edison’s failure to remove an imprudent investment, which was a breach of Edison’s duty of prudence. This, Tibble argues, is enough “[t]o defeat summary judgment.”Additionally, unlike Edison, Tibble asserts that the Ninth Circuit incorrectly “held that the initial inclusion of the retail-class shares started the limitations period on all of [Tibble’s] claims.”
This case presents the Supreme Court with the opportunity to clarify the interpretation and application of ERISA’s statutory language regarding when a claim becomes time-barred. Tibble argues that the duty of prudence includes a periodic review, and that a failure of this obligation commences a “breach” within the meaning of ERISA. On the other hand, Edison argues that this case should be dismissed entirely because the record does not reflect the question that the Court granted certiorari for, because this is a factual dispute regarding new breaches of fiduciary duty; or, in the alternative, the judgments of the lower courts should be affirmed. The Supreme Court’s resolution of the case could have important consequences for the scope of a fiduciary’s duty to protect employees and the future cost of 401(k) retirement plans.
The United States contends that ERISA is designed to protect the interests of employees who participate in a benefits package. The United States further contends that this is accomplished by enforcing “trust law duties on plan fiduciaries.” The United States asserts that a prudent trustee incurs only reasonable costs and in the context of mutual funds, the trustee must examine the various options. Additionally, the United States claims that ERISA fiduciaries have a continual duty to remove imprudent investments. Thus, according to the United States, the duty “applies even if the is not responsible for the initial investment decision or the initial decision is beyond challenge.”
The National Association of Manufacturers in connection with the U.S. Chamber of Commerce and other organizations (collectively, “NAM”), in support of Edison, maintain that adopting an ongoing review process of past decisions will inhibit fiduciary decision-making. The NAM states that this approach would increase litigation, therefore discouraging ERISA plans and effectively harming employees.
The Economic Cost OF IMPOSING AN ONGOING DUTY TO REVIEW 401(K) Plans
Cambridge Fiduciary Services LLC (“Cambridge”), in support of the Tibble, argues that reversal of the Ninth Circuit decision (thus likely imposing an ongoing duty on fiduciaries to review 401(k) plans) will not create more costs for plan fiduciaries or their employers. Cambridge asserts that an ongoing duty to monitor 401(k) plans would not change the behavior of plan fiduciaries because many plan fiduciaries and their investment consultants already adopt cheap monitoring schemes. Additionally, Cambridge maintains that the Ninth Circuit’s standard is impractical. Cambridge expresses concern that the Ninth Circuit’s standard is ambiguous in its definition regarding what “changes in conditions” prompt a “full diligence review.”
On the other hand, the Employee Stock Ownership Plan (“ESOP”), in support of Edison, states that a fiduciary’s duty of prudence does not include the constant review of past decisions. The ESOP argues that to conclude otherwise would be too costly, inefficient, and counterproductive. The ESOP maintains that requiring fiduciaries to engage in continuous reevaluation would increase monitoring costs. The ESOP worries that compelling fiduciaries to review all past decisions would increase the workload too much. Further, the ESOP fears that this additional review process will increase costs for third parties who conduct business with “ERISA-governed plans.” The ESOP claims that if third parties incur additional costs, they will pass the additional expenses to plan participants. Similarly, Edison states that imposing liability on fiduciaries for claims that fall outside of ERISA’s six-year limitation period will increase costs for plan participants. Edison believes that costs will increase because fiduciaries would have to expend more resources in order to monitor those decisions made in the past.
If the Supreme Court reaches the merits in this case, the Court will likely decide the scope of the duty of prudence for 401(k) fiduciaries and whether certain actions or omissions cause ERISA’s six-year limitations period to begin to run. The Court may find that periodic review of all fund investments is required to satisfy the duty of prudence in order to provide strong protection for retirement plan investors. Conversely, the Court may establish that such review is only needed upon a change in conditions of the investment. Ultimately, the Supreme Court’s decision, if it should reach the merits, will likely be guided by both its interpretation of the goals of the ERISA statute and the need to balance the retiree protection against deference to fund managers.
The authors would like to thank Professor Robert Hockett for his support with this preview.
- Employee Retirement Income Security Act--ERISA, United State Department of Labor (Last visited Feb. 1, 2014).
- Greg Stohr: 401(k) Fees at Issue as Court Takes Edison Worker Appeal, Bloomberg Business (Oct. 2, 2014).