The US Supreme Court issued its decision in Tibble v. Edison on May 18. The participants who brought the suit in Tibble alleged that the Edison fiduciaries breached their duties by offering as investment options classes of mutual funds with higher fees than other classes. For more details on the facts, please see our LawFlash. The issue that emerged as the case worked its way up to the Supreme Court, however, was a statute of limitations defense, because some of the mutual funds in question were initially selected by the Edison fiduciaries more than six years before the lawsuit was filed. The Edison fiduciaries argued before the US Court of Appeals for the Ninth Circuit that those claims were time-barred under ERISA’s six-year statute of limitations because the alleged breach (i.e., the selection of higher fee mutual funds) occurred outside the six-year period. The participants argued that keeping these funds constituted a continuing breach of fiduciary duty that extended well into the six-year statute of limitations. The Ninth Circuit agreed with the Edison fiduciaries and held that the claims with respect to that older group of funds were time-barred.
By the time the case got to the Supreme Court, however, the focus had shifted from the statute of limitations to the nature of the duty to monitor investment options on an ongoing basis. The discussion at oral arguments focused almost exclusively on the “contours” of the alleged breach of the duty to monitor, so it was perhaps not surprising when the Court vacated the Ninth Circuit’s judgment and remanded the case to the Ninth Circuit to consider “trust law principles” and the “nature of the fiduciary duty” at issue in this case.
To most plan fiduciaries, it is not surprising that there is a fiduciary duty to monitor investments on an ongoing basis. Indeed, we might expect that many readers of this blog spend a great deal of their time doing exactly that and supporting the fiduciary committees that have this responsibility. This may be why the Tibble opinion has been largely met with the formal equivalent of “duh” by many in the plan sponsor community.
Nevertheless, we think that there are some important takeaways from Tibble and that there could be more to come from the Ninth Circuit. Tibble serves as a reminder that a systematic, ongoing monitoring process is important. As with anything done repeatedly, there is the risk that the investment monitoring process could go on “auto pilot.” Fiduciaries should guard against that type of intertia and keep the monitoring process robust and meaningful. Doing so can be a good fiduciary risk-management tool. Of course, no mention of a good process can go without an accompanying reminder of the importance of documenting the good process. Without clear documentation, it could appear as if that process never happened if ever challenged in litigation or by a regulator.
The open substantive question is whether the Ninth Circuit will have the opportunity to articulate the exact “nature of the fiduciary duty” involved in the ongoing duty to monitor, and, if it does, whether it will be something practical and administrable for plans. A decision by the Ninth Circuit that adopts rigid or overly specific requirements could make it more difficult for fiduciaries and provide a new avenue for plaintiffs to allege a breach of fiduciary duty based on ongoing monitoring of investment options.
We’ll continue to keep an eye on this litigation as it returns to the Ninth Circuit. In the meantime, take this opportunity to double check your processes for ongoing monitoring and your documentation of those processes. It’s never a bad idea and may be a good one in light of this decision.