401k News: Supreme Court Update Q2 2015

401k Supreme Court Update

Ongoing Fiduciary Duty to Monitor Plan Investments

Under ERISA, the plan fiduciary (typically the plan sponsor or a plan committee) has a fiduciary obligation to monitor plan fees and pay only reasonable fees from plan assets. The DOL has focused significant attention on this fiduciary responsibility through its fee disclosure mandates. In addition to the DOL’s regulatory efforts, lawsuits alleging excessive fees have also drawn considerable attention to this important fiduciary responsibility.

One of those cases, Tibble v. Edison, made it all the way to the U.S. Supreme Court. In this case, the Ninth Circuit Court of Appeals affirmed a judgment in favor of plaintiffs who claimed it was not prudent for the plan fiduciaries to select higher priced retail mutual fund share classes for the plan when comparable lower priced institutional share classes were also an option. Both the district and the appellate court agreed that the choice of investments was imprudent, and awarded damages based on the investments that had been added to the plan investment menu within the six-year statute of limitations under ERISA. The participants appealed the case to the Supreme Court challenging the appellate court’s limitation of damages to investments initially added to the plan within six years before filing the lawsuit. The participants argued that plan fiduciaries had an ongoing duty to monitor all investments and that it was imprudent to continue offering retail class shares when lower cost institutional share classes were available, even though the investments had been initially selected more than six years prior to the lawsuit.

In the decision issued May 18, 2015, the Supreme Court applied trust law principles to recognize a continuing duty to monitor and remove imprudent investments. However, the Supreme Court stopped short of describing the scope of review that would be required, stating that the nature and timing of the review would vary depending upon the circumstances. The case was remanded back to the Ninth Circuit to determine whether there was a breach within the six-year statute of limitations period, recognizing the continuing duty to monitor investments and remove imprudent investments.