This article originally ran on June 15, 2015.
By Michael Webb
Wow, the Tibble v. Edison International Supreme Court decision really blew up in the media, didn’t it? And not just with the usual suspects, such as retirement plan media outlets, or even cable TV business channels. No, this was definitely mainstream; my local small-town radio station airs about two minutes an hour of local news from ABC, and this story even made that newscast!
Why did such a relatively mundane, brief (eight pages) and uncontroversially unanimous Supreme Court decision (did anyone seriously believe that the Court would rule that the duty to monitor investments would have an expiration date?) capture the attention of media outlets everywhere? In this article, we will examine this case and get to the bottom of the implications (if any) for retirement plan sponsors and those who work with them.
Edison International (Edison) added three retail share class mutual funds to its 401(k) plan investment lineup in 1999 and again in 2002. Plaintiffs (Tibble and other beneficiaries of the plan) sued Edison in 2007, arguing that Edison could have offered identical lower-cost institutional class mutual funds in each case, but refused to do so, thus breaching their fiduciary duty to defray (pay) only reasonable plan expenses.
But the defendants (Edison, et. al.) argued that the alleged initial breach, in 1999, was time-barred, since ERISA requires a breach of fiduciary claim to be filed no more than six years following the “date of last action which constitutes a part of the breach or violation” or “in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation.” Though seemingly an illogical argument (“I added an imprudent share class of at fund, but my liability ceases six years after I added it; I have no ongoing duty to monitor, retaining the investment is just fine!”), Edison presumably had case law on its side, since the trial court ruled in favor of the defendants. On appeal, the 9th U.S. Circuit Court of Appeals upheld the decision. The plaintiffs then appealed the decision to the Supreme Court.
Not surprisingly, the Supremes unanimously ruled that the 9th Circuit erred in applying the statutory period only to the initial decision to add the funds. Citing trust law, the High Court stated that there is a clearly an ongoing duty to monitor such investments, which should come as no surprise to anyone who serves in a fiduciary capacity for a retirement plan.
However, the Supreme Court also stated that they “expressed no view on the scope of the respondents’ (defendants) fiduciary duty in this case.” Thus, the decision is limited only to the issue of the six-year statute; the rest of the case, including whether a review of the funds in question was required — and, if so, what type review — was sent back to the 9th Circuit to decide. However, the holding was viewed as a significant victory for the plaintiffs, since the trial court already ruled in their favor regarding the 2002 fund additions.
As discussed above, the case has received a great deal of media scrutiny, which seems unwarranted based on the limited scope of the issue that was decided. Perhaps it is just the fact that the Supremes have decided so many controversial issues lately, that any decision of the High Court is bound to be a featured news story.
Unfortunately, some recordkeepers and other third parties who work with retirement plans appear to be overreacting to the media message, warning plan sponsors that invest in retail share classes of mutual funds that they may longer be permitted to do so. Such advice, of course, has nothing to do with what the High Court actually decided.
For ERISA plan sponsors that already are following a prudent due diligence process in selection and monitoring investment options, there is likely to be little impact from the Supreme Court decision, as such sponsors already assumed that they had an ongoing duty to monitor funds. However, for plan sponsors who are less diligent, the media attention given to the ruling (though not the actual ruling itself), will hopefully motivate them to improve their due diligence process.
Adviser Practice Pointer: advisers who work with ERISA plan sponsors should follow Tibble and related litigation closely and incorporate information regarding such cases into their fiduciary training process.
Michael A. Webb, AIF™, CEBS, TGPC, is the co-chair of the NTSA Communications Committee and a Vice President at Cammack Retirement Group.
Cammack Retirement is an independent retirement plan consulting firm specializing in non-profit industries. Offering tailored, actionable solutions, to help clients achieve the greatest return on their employee investment, Cammack Retirement delivers end-to-end solutions for complex retirement plan challenges.
Please note that this article is for general informational purposes only, is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.