Monitoring investments doesn’t end

A case under review by the Supreme Court pits the interests of plan sponsors against plan participants and promises to resonate across future plan litigation. The outcome of Tibble v. Edison will either reduce litigation risks for plan sponsors or affirm a high fiduciary standard for the ongoing monitoring of plan investments.

The pivotal question under review is whether an imprudent fund selection decision by retirement plan fiduciaries constitutes a one-time breach or triggers a succession of breaches if the fiduciaries fail to address the imprudent position during investment-monitoring activities.

The U.S. Court of Appeals for the Ninth Circuit found that Edison International, a California electric utility, failed to prudently investigate three lower-cost institutional shares that were available in lieu of identical but higher-cost retail share classes in the plan. Another three retail share funds were not reviewed by the trial court or the Ninth Circuit because they were deemed “time barred” under the six-year statute of limitations of the Employee Retirement Security Income Act.

The reason Tibble has drawn the Supreme Court’s attention is the question of whether the statute of limitations stopped the clock on claims alleging imprudent selection of these investment options more than six years earlier. In other words, do plan sponsors or their co-fiduciaries — such as retirement plan advisers — have an ongoing duty to monitor fund expenses that can trigger recurring instances of imprudence when funds with unnecessarily high costs are retained?

COURT REVIEW

The Supreme Court requested a brief on the matter from the U.S. Solicitor General. That brief rejected important aspects of the lower court’s decision and recommended on behalf of the U.S. that the court grant a review on the statute-of-limitations issue. On Oct. 2, 2014, the court granted the review.

Several amicus briefs supporting the Tibble petition have now been filed with the Supreme Court (in addition to the earlier brief provided by the Solicitor General). For the most part, they point to court decisions under trust law that reinforce the duty to monitor and echo the role of monitoring as a standard industry practice.

One brief, submitted by the Pension Rights Center, cited a recent industry survey showing 95% of the 265 plans surveyed review investment selections and performance: 65% quarterly, 17% twice a year and 13% annually. The brief argued that under the Ninth Circuit’s decision, ERISA fiduciaries would have less incentive to monitor investment options and routinely seek lower-cost, better-performing funds, with consequent harm to plan participants.

The Solicitor General’s brief is the most comprehensive and compelling. It is also unequivocal, stating bluntly: “None of the court of appeals’ reasons for finding petitioners’ claims untimely has merit. First, petitioners’ claims are based not on the initial decision to offer the higher-cost funds as plan investments, but on the breaches of fiduciary duty committed when the imprudent investments remained in the plan. These claims do not rely on a “continuing violation theory’ … they concern only acts and omissions within the limitations period — petitioners are not seeking to reach back and recover for fiduciary breaches before that time. Second, petitioners’ claims do not impose liability on current fiduciaries for past fiduciaries’ mistakes … Third, a plaintiff is not required to demonstrate significant changes in circumstances to challenge the imprudent retention of plan investments. Under the law of trusts, a trustee must periodically review trust assets and remove imprudent investments, regardless of whether there has been a significant change in circumstances.”

It seems obvious that the Ninth Circuit’s decision is flawed in that it fails to differentiate the duty to actively monitor investments from the initial selection decision.

LEGAL OBLIGATION

Investment due diligence and monitoring are distinct fiduciary obligations well-established in law and practice. Fiduciary breaches by acts of commission in the first instance and omission in the other can have profound adverse consequences for plan participants and are actionable under the law. Failing to monitor investments and to replace them when necessary amounts to ongoing negligence on the part of plan fiduciaries. It is hard to imagine that the Supreme Court will uphold the lower court’s position in this case.

Oral arguments take place Feb. 24. A decision should come by June.

Blaine F. Aikin is president and chief executive of fi360 Inc.