The Supreme Court is poised to address whether fiduciaries' decisions—especially in using fee sharing arrangements—are subject to deference when challenged. The Eighth and Ninth Circuit courts recently decided these issues, with one to be partially addressed by the Supreme Court and the other awaiting a cert determination.
As to Tibble v. Edison International1, the Supreme Court recently granted Tibble's pending petition for certiorari challenging the Ninth Circuit's decision that ERISA's six-year statute of limitations barred claims based on the plan's retention of higher-cost retail-class mutual funds that were first selected as plan investments more than six years before suit was filed because there is no "continuing violation" theory under ERISA.
The Court declined to consider Tibble's other challenge to the Ninth Circuit's decision that the deferential abuse of discretion standard, outlined in Firestone2as applicable to judicial review of ERISA § 502(a)(1)(B) benefit claims, also applies to review of ERISA § 404(a)(1)(D) fiduciary duties related to plan interpretation in pension plan disputes. The Ninth Circuit, reviewing under the abuse-of-discretion standard, found that the plan's use of revenue sharing to pay for plan costs (1) did not violate the terms of the plan, which provided simply that "[t]he cost of the administration of the Plan will be paid by the Company[,]" and (2) did not violate ERISA § 406(b)(3)'s prohibition on fiduciary self-dealing based on the DOL's regulatory interpretation that revenue sharing payments do not constitute "consideration" received but rather are akin to permissible incurred expense reimbursements. However, the court did note that liability might attach to a revenue sharing arrangement in certain circumstances where there is evidence that the arrangement drives up the fund's 12b-1 fees and overall expense ratios and/or that fiduciaries are driven to select funds because of the financial benefit of revenue sharing.
The Supreme Court's decision to limit review to just limitations follows the Solicitor General's recommendation in the federal government's recent amicus brief. The Solicitor General asserted that plan fiduciaries have a continuing fiduciary duty to review plan investments and eliminate imprudent ones and, subsequently, breach that duty when they fail to monitor and periodically evaluate the performance of and fees charged by plaintiff investments, fail to investigate alternative investment options, and fail to remove funds that shortchange participants by charging excessive fees.3 Because, it contended, the Ninth Circuit court wrongly decided the issue and a circuit split exists (Ninth and Fourth versus Second and Seventh), the issue is ripe for review.
As to the second issue, the Solicitor General agreed that the lower court correctly concluded that an abuse-of-discretion standard applies to an ERISA § 404(a)(1)(D) claim that a fiduciary has violated plan terms because the claim turns on the reasonableness of the fiduciary's plan interpretation and the court should give deference if the plan grants the fiduciary discretion.4 Further, no circuit split exists on this narrow issue—although one does on whether the abuse-of-discretion standard applies to claims of fiduciary breaches of the duties of loyalty and prudence set out in ERISA § 404(a)(1)(A)—(C) (see e.g. Tussey below), with the government noting that no deferential review should apply in the latter. Finally, the government posited that the case would be a "poor vehicle" for deciding the issue due to the lower court's failure to fully consider certain factors related to the fiduciary's interpretation and minimal focus of the issue in the briefing.
In Tussey v ABB Corp5, the Eighth Circuit recently held, in part, that:
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the deferential abuse of discretion standard applies to the judicial review of all ERISA § 404 fiduciary duties which the plaintiff asserted the plan violated, going a step further than Tibble which confined this deferential review to just interpretation of plan documents;
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notwithstanding this deferential review, the plan fiduciaries still breached their duties by failing to monitor payments for recordkeeping made through a revenue sharing arrangement and allowing plan assets to be used to subsidize corporate administrative services; and
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the lower court failed to apply the deferential standard of review and wrongfully substituted its own interpretation of the plan documents in evaluating the fiduciaries' investment selection and mapping, thereby reversing the lower court's breach finding.
The court thereafter denied both parties' petitions for rehearing, and Tussey has filed a petition for certiorari requesting the Supreme Court to determine whether the deferential abuse of discretion standard applies to alleged breaches of the duties of loyalty and prudence under ERISA § 404(a)(1)(A)—(B) and to find that the standard does not apply.6 In support, Tussey points to a circuit split on the issue (Second and Third against deferential review and the Eighth and Ninth applying deferential review) and the distinction between benefit claims brought by individuals, where Firestone deference is appropriate, and fiduciary breach actions based on statutory "judicially enforced" standards, where it is not. In light of the Solicitor General's comments and the Supreme Court's decision on the Tibble petition, it is likely that the Court will take up this discretionary review issue in Tussey.
Impact upon your plan: While both circuit courts recognized the prevalence and industry acceptance of revenue sharing arrangements, these decisions signal possible increased judicial scrutiny, which may be further compounded if the Supreme Court considers eliminating deferential review on some of the ERISA § 404 fiduciary duties. Nevertheless, plan fiduciaries should be mindful of the performance of their revenue sharing arrangement and their effectiveness in addressing plan costs.
1 711 F.3d 1061 (9th Cir. 2013), cert. granted in part, 2014 U.S. LEXIS 4901 (U.S. Oct. 2, 2014) .
2 Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).
3 Brief for the Unites States as Amicus Curiae, , p. 8, Tibble v. Edison Int’l, 2014 U.S. S. Ct. Briefs LEXIS 2849 at *16 (August 19, 2014).
4 Id., p. 17, 2014 U.S. S. Ct. Briefs LEXIS 2849, *29.
5 746 F.3d 327 (2014).
6 Petition for Writ of Certiorari, Tussey v. ABB, Inc., 2014 U.S. S. Ct. Briefs LEXIS 2718 (August 5, 2014).
