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Aon Retirement and Investment Blog

ERISA U.S. Fiduciary Responsibility: Tibble vs Edison


Recent U.S. Case Law Update:
U.S. Supreme Court Recognizes that ERISA Fiduciaries Have Ongoing Duty to Monitor Plan Investments

To satisfy their ERISA duty of prudence, U.S. investment fiduciaries for a qualified retirement plan covered by the Employee Retirement Income Security Act of 1974, as amended (ERISA) must undertake a regular and periodic review of available designated investment alternatives under the plan and remove investment options that are no longer prudent.

On May 18, 2015, a unanimous Supreme Court in Tibble v. Edison International held that the 9th Circuit Court of Appeals erred when it barred a claim that the plan’s fiduciaries had breached their ERISA duty of prudence because the participants’ claim was brought more than six years after the investment funds were originally selected. In reversing the 9th Circuit, the Supreme Court emphasized that ERISA plan fiduciaries must discharge their responsibilities with the “care, skill, prudence, and diligence” of a prudent person acting in a like capacity—responsibilities that include a continuing obligation to monitor plan investments.

In its decision, the Supreme Court noted that the plan fiduciary must “systematically consider all investments of the trust at regular intervals” to ensure that the designated investments remain appropriate (prudent). The Court further noted that this continuous duty to monitor a plan’s designated investments exists separate and apart from (and in addition to) the fiduciary’s duty to exercise prudence in selecting the investment at the outset. Thus, claims involving compliance with this ongoing obligation will not generally be time-barred by the ERISA statute of limitations.

Background

Edison International (Edison) is a public holding company for various electric utilities located primarily in southern California, and is the plan sponsor of the Edison 401(k) Savings Plan (Edison Plan). In 2007, Edison was sued by a group of participants for an alleged breach of fiduciary duty for offering six so-called “retail class” mutual funds when identical (or nearly identical) versions of those mutual funds were alleged also to be available on an “institutional share class” basis to similarly sized plans and at a significantly lower cost (e.g., lower expense ratios) to plan participants. Three of the six retail mutual funds at issue were added in 1999 and the other three were added in 2002.

The federal district court that first considered the case held that the Edison fiduciaries had acted imprudently when they added three retail mutual funds to the Edison Plan in 2002 without apparent consideration of the nearly identical institutional share class alternatives for those same three funds. The district court, however, also found that the breach of fiduciary duty claims with respect to the mutual funds added in 1999 had not been timely brought by participants and were time-barred under ERISA’s general six-year statute of limitations period (which commences from the last action constituting the breach, or the last day by which the omission could have been corrected).

On appeal, the 9th Circuit Court of Appeals affirmed the decision reached by the district court on the six retail mutual funds, concluding that Edison’s addition of three retail mutual funds in 2002 represented a breach of fiduciary duty and that similar breach of duty claims regarding the three funds added in 1999 were not timely raised because the Edison participants had not established that there was a “significant change in circumstances” that might trigger a new six-year limitation period under ERISA. The Supreme Court subsequently reversed the 9th Circuit decision for the reasons described more fully above.

Next Steps for ERISA Investment Fiduciaries

Fiduciaries would be well served to consider how the Supreme Court’s decision in Tibble impacts their retirement plan processes and fiduciary practices. To assist ERISA fiduciaries in that analysis, the following processes should be considered:
  • Review/Establish Procedures for Evaluating Designated Investment Alternatives. Plan fiduciaries should have a detailed written procedure to evaluate the initial selection and continued monitoring and retention of a plan’s investment options (e.g., each investment fund, including qualified default investment alternatives, or QDIAs). The Court’s decision in Tibble represents a strong reminder to plan fiduciaries that their fiduciary responsibilities with respect to plan investments continue well beyond the initial selection period and require continuous evaluation of the underlying investments. This obligation requires that the plan fiduciaries determine whether the underlying plan investments continue to be in the best interest of plan participants.
  • Consider Periodic Evaluation of Investment Funds and Related Fees. Many practitioners have long recognized the importance of routine and periodic (e.g., quarterly or semi-annual) reviews of a plan’s designated investment alternatives. In order for plan fiduciaries to mitigate the risk of claims similar to those in Tibble, however, it is advisable that the plan fiduciaries periodically review the underlying plan investments for their comparative performance and for any investment fees associated with the funds. Following such review, which may include drawing upon third-party resources to provide market perspective, the plan fiduciaries should include in the investment committee minutes the financial data considered and such other information relevant to determining that the selection or retention of the investment funds was prudent at that time.
  • Procedures for Evaluation of Employer Stock Investments. The Supreme Court’s decision in Tibble further underscores the Court’s position that ERISA fiduciaries must continuously monitor plan investments, including employer stock investments. In 2014, in Fifth Third Bancorp v. Dudenhoeffer, for example, the Supreme Court held that ERISA fiduciaries must evaluate plan investments in employer securities like any other designated investment and subject them to the same level of fiduciary oversight. Combining the mandates from the Tibble and Dudenhoeffer decisions, investment fiduciaries with oversight for employer stock investments also need to develop a process for the regular and periodic review of those employer securities. This review should be structured in a fashion similar to the scrutiny given to other plan investment funds (e.g., comparison of the employer security performance against a specific benchmark investment).
  • Adoption/Periodic Evaluation of Investment Policy Statement (IPS). Many sponsors of qualified retirement plans may already have an IPS that describes how plan investment alternatives are selected and evaluated. Of course, having an IPS is quite different from actually following the processes set forth in the IPS. Plan fiduciaries should develop a record demonstrating the processes they use to support the selection and retention of their plans’ underlying investment options in order to support the prudence of having such investment funds in the plan. Sponsors without an IPS should consider the benefits of adopting one—and following it.
  • Investment Minutes May Need to Document Certain Specific Actions. Investment fiduciaries should document their initial selection and retention of their plans’ designated investment options. Fiduciaries should also be aware that certain specific actions may need particular documentation and support (e.g., the selection or retention of a retail mutual fund share class where an otherwise identical institutional share class is available to the plan, or retention of a relatively high-cost QDIA like a target date fund).
The recent decisions by the Supreme Court in Dudenhoeffer and now Tibble serve to remind plan fiduciaries that they must continue to monitor plan investments and must recognize that while a plan investment may have been appropriate at the time it was originally selected, subsequent events could cause that investment to become imprudent. Evaluating these investment funds in a periodic and structured manner will go a long way toward mitigating risks for fiduciaries.

 
Prepared by the Aon Hewitt Retirement Legal Compliance & Compliance group.
 
Content prepared for US subscribers, but available to interested subscribers of other regions.

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs.Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.


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