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US Supreme Court holds that action for breach of fiduciary duty to monitor 401(k) investments not time-barred

Tibble, Glenn v. Edison International (2015, S Ct) 2015 US No. 13-550

The Supreme Court has held that as long as an alleged breach of the continuing duty to monitor the investments of a 401(k) plan occurred within six years of the time a fiduciary breach suit is brought, the claim is timely. The case involved a 401(k) plan that added retail class mutual funds as investment options instead of institutional class funds.

Facts. Edison International maintained a 401(k) Savings Plan for its employees. Because the plan was a defined contribution plan, participants’ retirement benefits were limited to the value of their own individual investment accounts, less expenses. Expenses such as management or administrative fees can significantly reduce the value of a participant’s account.

In ’99, and again in 2002, the plan added three mutual funds to the plan as investments in which participants could choose to invest. These funds were allegedly retail-class mutual funds, higher priced than the institutional-class mutual funds that had been available to the plan previously. The higher priced mutual funds supposedly cost plan participants wholly unnecessary administrative fees.

In 2007, individual plan beneficiaries filed a lawsuit on behalf of the plan and all similarly situated beneficiaries (the petitioners) against Edison International and others (the respondents). The petitioners sought to recover damages for losses allegedly suffered by the plan, in addition to injunctive and other equitable relief based on alleged breaches of fiduciary duties owed by the respondents. Specifically, the petitioners claimed that a large institutional investor with billions of dollars, like the plan, could have obtained materially identical, lower-priced institutional-class mutual funds that were not available to retail investors.

Lower courts. The district court agreed with the petitioners with regard to the 2002 funds, finding that the higher-priced mutual funds had cost plan participants unnecessary administrative fees. The court thus found that respondents had failed to exercise the care, skill, prudence, and diligence required under the circumstances.

However, as to the ’99 funds, the district court held that the petitioners’ claims were untimely because, unlike the 2002 funds, the ’99 funds had been included in the plan more than six years before the complaint was filed in 2007. As a result, the court held that the 6-year statutory period had run. The 6-year period at issue is ERISA § 413, under which no action may be commenced with respect to a fiduciary’s breach of any duty or ERISA violation after the earlier of (1) the date of the last action that constituted a part of the breach or violation, or (2) in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation. Both clauses of ERISA § 413 require only a breach or violation to start the 6-year period.

The district court acknowledged that if the funds had undergone significant changes within the six-year limitations period, then the respondents should have been prompted to undertake a full due-diligence review. However, the district court concluded that circumstances had not changed enough to obligate the respondents to review the plan’s mutual fund investments. As a result, the court concluded that with respect to the ’99 funds, the petitioners’ claims were untimely.

The Ninth Circuit affirmed the district court as to all its holdings regarding all six mutual funds.

The petitioners filed a petition for certiorari, and the Supreme Court agreed to review the holding regarding the ’99 funds.

Supreme Court’s ruling. The Ninth Circuit correctly asked whether the last action which constituted the breach of respondents’ duty of prudence had occurred within the relevant 6-year period, the Supreme Court said. But the Ninth Circuit focused only on the act of designating an investment for inclusion in the plan as the start of the 6-year limitations period.

The Supreme Court found that the Ninth Circuit had erred by applying the statutory bar to a fiduciary breach claim without having considered the nature of the fiduciary duty. More specifically, the Ninth Circuit did not take into account that under trust law, a fiduciary is required to conduct a regular review of its investments, with the nature and timing of the review contingent on circumstances, the Supreme Court said. Thus, a trustee has the continuing duty to monitor trust investments and remove imprudent investments within a reasonable time, the Court added. This continuing duty exists separate and apart from the duty to exercise prudence in selecting investments at the outset.

Where, as here, a plaintiff alleges that a fiduciary has breached the duty of prudence by failing to monitor investments and remove imprudent ones, as long as the alleged breach of the continuing duty occurred within six years of the suit, the claim is timely, the Supreme Court said. Thus, the Court vacated the Ninth Circuit’s judgment and remanded the case for further proceedings.

However, the Supreme Court expressed no view as to the extent of the fiduciary responsibility here, or whether Edison International had met its duty to monitor the plan investments. The Ninth Circuit was directed to consider this issue on remand.

In addition, the Supreme Court left to the Ninth Circuit the question of whether the plaintiffs, in failing to assert during lower proceedings that respondents didn’t meet their duty of monitoring the plan investments, had forfeited the right to raise this claim.

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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