ERISA Plan Sponsors – Are You Monitoring Investments and Fees?

Davis Wright Tremaine LLP

In a unanimous decision, the U.S. Supreme Court vacated the Ninth Circuit’s decision in Tibble v. Edison International and remanded for determination of the scope of an ERISA plan fiduciary’s duty to monitor plan investments while recognizing the importance of analogous trust law. Because the duty to monitor plan investments is continuous, the Supreme Court held that the statute of limitations had not run on investment decisions made in 1999 by the Edison International plan sponsor. Although it remains to be seen how the Ninth Circuit will define the scope of a fiduciary’s duty to monitor, plan sponsors should immediately review their investment monitoring practices to ensure that appropriate and reasonable procedures are in place.

Tibble and others claimed, on behalf of current and former 401(k) plan beneficiaries, that the retention of three retail-class mutual funds added to Edison’s investment lineup in 1999 constituted a fiduciary breach because materially identical institutional shares were available to the plan. The institutional shares offered lower fees than those charged for the plan’s retail-class funds. The lower courts dismissed Tibble’s claims on the ground that Tibble did not show a change in circumstances that arguably triggered an obligation to review and to change investments within the 6-year statutory limitation period.

The Supreme Court held that the Ninth Circuit erred by applying a statutory bar to a claim of “breach or violation” of a fiduciary duty without considering the nature of the fiduciary duty.  ERISA is derived from the common law of trusts. Thus, a fiduciary is required to “systemically” evaluate investments at regular “intervals,” i.e., conduct a regular review of the plan’s investments with the nature and timing of the review contingent on the circumstances. See Central Sates, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U.S. 559, 570 (1985). Under trust law, a trustee has a continuing duty to monitor that is separate and apart from the duty to exercise prudence in the initial selections of investments. The duty to monitor continues regardless of when the investments were added to the plan.

As a result, the statute of limitations under ERISA does not begin to run at the time of selection, but rather from the last point the fiduciaries did not adequately monitor investments. The Supreme Court declined to address the scope of a fiduciary’s duty to monitor, remanding for the Ninth Circuit with instructions to consider the time of the alleged breach and recognize the importance of analogous trust law.

So where does this leave plan fiduciaries who are trying to do their best? Although not mentioned by the Supreme Court, the U.S. Department of Labor’s position on the duty to monitor or its regulations under ERISA Section 404(c) states that a prudent fiduciary’s monitoring program should include: (1) a formal investment policy, which includes guidelines for evaluating investment performance, (2) a review of plan investment fees and expenses, which review includes a bench marking of the reasonableness of such fees and expenses and how they are allocated to participants, and (3) pursuant to the investment policy, regular conduction of the requisite evaluations and reviews. A prudent fiduciary will likely also retain an outside investment advisor to evaluate fund performance and to benchmark fund experience.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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