With ERISA entering its 41st year, commentators highlighting the landmark legislation's successes and failures have paid little attention to the newfound focus on fiduciary responsibility resulting from an increase in litigation from alleged fiduciary breaches, particularly in 401(k) defined contribution plans.
Much of the litigation has resulted in awards and settlements favorable to plan participants, but what remains are important challenges to the fiduciary standard of care of the Employee Retirement Income Security Act. Some are now likely to come before the U.S. Supreme Court, which already has ruled favorably this year in support of this standard.
In Fifth Third Bancorp vs. Dudenhoeffer, the Supreme Court last June struck down a presumption of prudence, known as the Moench presumption, which had for some years protected plan fiduciaries in employee stock ownership plan stock drop cases against claims for imprudently retaining employer stock as a plan investment unless the employer could be shown to be in a dire situation.
In the Fifth Third case, the court found the law did not create any special presumption favoring fiduciaries of employee stock ownership plans. Rather, the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, which is the prudent expert standard of care.
Obstacles highlighted by the court still remain to succeeding in claims for fiduciary breach in ESOP stock-drop cases, because claims in such cases often involve the use of non-public information and complex securities law issues. But the rejection of the Moench presumption bodes well for the fiduciary standard of care. If cases yet to come before the Supreme Court receive similar treatment, those concerned about employee retirement income security may well have reason to celebrate ERISA's passage into middle age.
In the next 401(k) case coming before the Supreme Court, Tibble et al. vs. Edison International et al., the court will consider whether denial based on the statute of limitations of a fiduciary breach claim involving imprudent initial fund selection will proscribe a claim for failure to prudently monitor and replace those funds on a continuing basis.
Both the district and appeals courts found that to allow such a claim would defeat the purpose of the statute of limitation. But that reasoning ignored ERISA's separate duty to periodically monitor and evaluate plan investments once selected.
The appeal on this issue is supported by Donald B. Verrilli, U.S. solicitor general, who, in an amicus brief requested by the Supreme Court, pointed out that to prevent a claim based on a continuing fiduciary duty to monitor investments effectively exempts plan fiduciaries from important ongoing fiduciary duties concerning investment options first offered more than six years earlier and fails to protect participants retirement savings.
A second issue in Tibble, one involving an abuse of discretion theory, was not accepted for review by the Supreme Court. An opportunity to expand the decision in Moench to other forms of fiduciary deference was, therefore, lost. However, the Supreme Court will have another opportunity to consider the issue in another case, Tussey vs. ABB Inc.
The Supreme Court has been petitioned to review the fiduciary standard of care in the Tussey case. In this 401(k) case, ABB plan fiduciaries were subject to allegations over several issues: failing to monitor record-keeping costs and negotiate rebates available to the plan; selecting more expensive share classes when less expensive share classes were available; failing to abide by selection and monitoring criteria contained in the plan's investment policy statement when changing fund options in the plan's investment menu; and agreeing to pay Fidelity Management Trust Co., the plan's record keeper and trustee, higher than market costs for record keeping in order allegedly to subsidize corporate services provided by Fidelity to ABB.
The U.S. Court of Appeals for the 8th Circuit upheld a lower court's decision that ABB had violated its fiduciary duties by failing to monitor and control record-keeping fees and by allowing the plan to subsidize corporate services, but it found that the lower court had failed to apply an abuse of discretion standard to how ABB applied its selection and monitoring criteria when switching investment funds and accordingly remanded the case for further deliberation.
So once again, in face of a clear ERISA mandate requiring plan fiduciaries to act as would a prudent expert, we see continued application of a legal fiction that gives deference to plan fiduciaries' imprudent decisions. While some will argue that the Moench presumption differs from an abuse of discretion or fiduciary deference theory, the underlying flaw is the same. By giving any deference to plan fiduciaries in fiduciary breach cases, the courts are undermining ERISA's clear direction that plan fiduciaries must act as would a prudent expert, the hallmark of a fiduciary standard of care.
The Supreme Court has an important opportunity to unfetter ERISA's fiduciary standard of care from contrived impediments. So doing would strengthen employee retirement income security. This already faces plenty of challenges. Diminishing ERISA's prudence standard should not be one of them. n
Roger L. Levy is CEO of Cambridge Fiduciary Services LLC, Scottsdale, Ariz.