Today, May 18, 2015, the Supreme Court unanimously ruled in favor of the plaintiff plan participants in Tibble v. Edison. The decision reversed an earlier 9th Circuit ruling that under ERISA’s six year statute of limitations, a claim involving a plan investment that was initially chosen outside the 6 year window from when a lawsuit is brought could only be viable if there was a change in circumstances that would cause a fiduciary to reexamine the fund’s inclusion in the plan. The Supreme Court rejected this interpretation, finding that under ERISA, there is a continuing duty to monitor and remove imprudent investments. Today’s decision also effectively reversed rulings in the 4th and 11th Circuits that were similar to the 9th Circuits.
As we suggested may happen, the Supreme Court voted 9-0 to reverse the 9th Circuit but did so in a way that did not definitively rule on how exactly a claim must be plead to trigger the continuing duty to monitor and remove.
The decision by Justice Breyer began its analysis by examining the previous 9th Circuit decision:
The Ninth Circuit correctly asked whether the “last action
which constituted a part of the breach or violation” of
respondents’ duty of prudence occurred within the relevant
6-year period. It focused, however, upon the act of
“designating an investment for inclusion” to start the 6-
year period…The Ninth Circuit stated that “[c]haracterizing the mere continued offering of a plan option, without more, as a subsequent breach would render” the statute meaningless and could even expose present fiduciaries to liability for decisions made decades ago…But the Ninth Circuit jumped from this observation to the conclusion that only a significant change in circumstances could engender a new breach of a fiduciary duty, stating that the District Court was “entirely correct” to have entertained the “possibility” that “significant changes” occurring “within the limitations period” might require “‘a full due diligence review of the funds,’” equivalent to the diligence review that respondents conduct when adding new funds to the Plan.
The decision then rejects this approach:
We believe the Ninth Circuit erred by applying a statutory bar to a claim of a “breach or violation” of a fiduciary duty without considering the nature of the fiduciary duty. 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.
Different Justices of the Supreme Court showed during oral arguments that they struggled with the question of exactly what this continuing duty to monitor looks like. Rather than resolve the question, they have remanded the case back to the 9th Circuit to decide what the duty to monitor requires and whether the plaintiffs here met that burden to have viable claims. But they did so while also providing important context from trust law. Here are few excerpts:
Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset. The Bogert treatise states that “[t]he trustee cannot assume that if investments are legal and proper for retention at the beginning of the trust, or when purchased, they will remain so indefinitely.” A. Hess, G. Bogert, & G. Bogert, Law of Trusts and Trustees §684, pp. 145–146 (3d ed. 2009) (Bogert 3d). Rather, the trustee must “systematic[ally] conside[r] all the investments of the trust at regular intervals” to ensure that they are appropriate. Bogert 3d §684, at 147–148; see also In re Stark’s Estate, 15 N. Y. S. 729, 731 (Surr. Ct. 1891) (stating that atrustee must “exercis[e] a reasonable degree of diligence in looking after the security after the investment had been made”); Johns v. Herbert, 2 App. D. C. 485, 499 (1894) (holding trustee liable for failure to discharge his “duty to watch the investment with reasonable care and diligence”). The Restatement (Third) of Trusts states the following: “[A] trustee’s duties apply not only in making investments but also in monitoring and reviewing investments, which is to be done in a manner that is reasonable and appropriate to the particular investments, courses of action, and strategies involved.” §90, Comment b, p. 295 (2007).
The Uniform Prudent Investor Act confirms that “[m]anaging embraces monitoring” and that a trustee has “continuing responsibility for oversight of the suitability of the investments already made.” §2, Comment, 7B U. L. A. 21 (1995) (internal quotation marks omitted). Scott on Trusts implies as much by stating that, “[w]hen the trust estate includes assets that are inappropriate as trust investments, the trustee is ordinarily under a duty to dispose of them within a reasonable time.” 4 A. Scott, W. Fratcher, & M. Ascher, Scott and Ascher on Trusts §19.3.1, p. 1439 (5th ed. 2007). Bogert says the same. Bogert 3d §685, at 156–157 (explaining that if an investment is determined to be imprudent, the trustee “must dispose of it within a reasonable time”); see, e.g., State Street Trust Co. v. DeKalb, 259 Mass. 578, 583, 157 N. E. 334, 336 (1927) (trustee was required to take action to “protect the rights of the beneficiaries” when the value of trust assets declined).
The decision then summarized its holding as follows:
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.
Finally, the Supreme Court made clear that it was not ruling on the scope of the duty to monitor:
We express no view on the scope of respondents’ fiduciary duty in this case. We remand for the Ninth Circuit to consider petitioners’ claims that respondents breached their duties within the relevant 6-year period under §1113, recognizing the importance of analogous trust law.
This is obviously a significant victory for the plaintiffs in this case and plan participant lawsuits generally, as many lawsuits in the last 5 years had been dismissed citing the overly restrictive interpretation of ERISA’s six year statute of limitations.
In plain English, what this decision holds is that if a plaintiff can make a valid claim for a violation of the continuing duty to monitor, there is a effectively now a rolling 6 year window of liability. But of course, now the question is: what exactly is that duty and did the defendants violate it here? The panel of three 9th Circuit judges that previously rules in favor of the defendants will get the first chance to answer those questions. Additionally here for these plaintiffs, the defendants have raised an argument that amounts to a technicality that the plaintiffs failed to raise a duty to monitor claim in the lower courts. The Supreme Court again stated that they had no opinion on the matter and would let the 9th Circuit decide.
So what does this decision mean for the (quite probably) millions of ERISA fiduciaries out there? There is no longer any dispute that a fiduciary must have a process to monitor a plan’s investments. We think it is also fair to say that this duty to monitor extends to all other areas of plan administration and responsibility (e.g. fees paid to providers, quality of providers, whether services are necessary, etc…) However, the duty does depend on the circumstances as the Supreme Court pointed out by citing to ERISA’s statutory language. But we suggest that if a fiduciary does not have a robust monitoring process in place, they do not wait for any further court decisions. Develop a process, document why you think it’s a prudent process, and execute that process.
As we’ve done for the Tibble case since the original decision in the 9th Circuit through the granting of the cert petition, we will continue to update our readers on any further developments.