In the case of Tibble v. Edison Int’l, US Supreme Court No. 13-550, reversing and remanding in part 711 F.3d 1061 as revised in 729 F. 3d 1110 CA9 the United States Supreme Court looked at the period of time a plan fiduciary may be held liable for a breech of fiduciary duty related to the selection of investments made available to qualified plan participants. The Supreme Court, in a unanimous opinion, found that the District Court and Ninth Circuit had applied too restrictive a standard in determining when the clock began running on the statute of limitations.

The case revolved around the allegation that the plan fiduciaries (including the plan sponsors) had breached their duty to the plan participants by allowing the plan to offer a number of retail, rather than institutional, mutual funds to plan participants. The funds in question had been added to plan at two times, first in 1999 and then in 2002.

The plaintiffs argued that mutual funds offered at retail normally were charged higher fees than similarly situated institutional funds and that the size of the plan in question was such that had the plan fiduciaries entered into negotiations with the fund companies they would have been able to obtain the same offerings in institutional funds, resulting in lower fees being charged to plan participants. As Justice Breyer, writing the opinion for the Supreme Court, noted:

Petitioners asked, how could respondents have acted prudently in offering the six higher priced retail-class mutual funds when respondents could have offered them effectively the same six mutual funds at the lower price offered to institutional investors like the Plan?

All of the courts involved agreed that the question of whether the fiduciaries had shirked their duty by not entering into negotiations to obtain a lower cost option was a matter that, if proven by the plaintiffs, would result in a potential claim for damages from the plaintiff. But the question was whether, at least for some of the funds, the plaintiffs had waited too long to bring their suit.

Under ERISA §413 there is a 6 year statute of limitations on brining a claim for a breech of fiduciary duty. The plaintiffs had filed their suit in 2007. The District Court ruled that the statute started running when the funds were added to the plan—thus the plaintiffs had filed suit too late to claim a breech of duty related to the funds added in 1999, though they were in time to file suit on the funds added in 2002. The Ninth Circuit concurred in this view.

However the Supreme Court did not agree that the only potential breech was the initial selection of the funds in 1999. Justice Breyer writes:

The Ninth Circuit did not recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.

Thus, the Supreme Court found, the failure of (or failure to conduct) a regular review within the 6-year period would itself be a breech of fiduciary duty. The Court notes:

In short, under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. 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. The Ninth Circuit erred by applying a 6-year statutory bar based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty.

The Court did not decide that, in fact, a breech had occurred by failing to remove imprudent investments during the six year period or even that there was a requirement to consider the specific funds, leaving that for the Ninth Circuit Court of Appeals to consider on remand.

However the fact that a unanimous Supreme Court decided that it was not appropriate to limit the exposure to six years from the date the questioned investment fund was selected is important to note. As is often the case the Supreme Court decided to avoid the “messy” issue of outlining exactly how a rule is to work (guidance that advisers may wish to have), rather just telling us that such a rule is out there.

But given the unanimity of the Court, it seems reasonable to assume that some level of review is necessary and that those who sponsor such plans should consider carefully reviewing investment offerings for the underlying costs of the investments. This has been an area of interest for the Department of Labor for a number of years, and certainly this decision is not likely to suggest to the Department that their interest is misplaced.