The U.S. Supreme Court on Monday broadened the responsibility of defined contribution plans, saying they have a “continuing duty to monitor trust investments and remove imprudent ones” even though federal law sets a six-year time limit for lawsuits alleging breaches of fiduciary duty.
The court ruled unanimously in the case of Tibble et al. vs. Edison International et al., in which Edison 401(k) participants accused the plan and its executives of breaching their fiduciary duties by choosing certain retail-priced investments over less-expensive institutionally priced versions of the same investments.
The Supreme Court on Monday vacated a ruling by the 9th U.S. Circuit Court of Appeals in Pasadena, Calif., which had decided in favor of Edison. The appeals court in 2013 had agreed with a federal District Court, which also ruled against the participants in rejecting their claim of fiduciary breach regarding three retail mutual funds.
The District Court had dismissed the claim because the funds had been introduced in 1999 and the lawsuit was filed in August 2007 — beyond the six-year limit for claims established by the Employee Retirement Income Security Act. The case was remanded to the appeals court “for further proceedings consistent with the opinion,” the Supreme Court decision said.
The Supreme Court said the 9th U.S. Circuit Court of Appeals had made a mistake when it applied the ERISA time limit “without considering the role of the fiduciary’s duty of prudence under trust law,” according to the opinion written by Justice Stephen Breyer.
“The 9th Circuit erred by applying a six-year statutory bar based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty,” Mr. Breyer wrote. “The 9th Circuit did not recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.”
The court noted that both the participants and Edison “now agree” that fiduciaries have “a continuing duty to monitor investments and remove imprudent ones.” However, the court opinion added that the two sides disagree “with respect to the scope of that responsibility.” Determining the scope is an issue for the appeals court, the opinion said.
“I am very pleased that the Supreme Court said there is an ongoing duty to monitor investment,” Jerome J. Schlichter, the lead attorney for the participants, said in an interview. “Fiduciaries can’t put decisions on investments on autopilot.” Mr. Schlichter is the founding and managing partner of law firm Schlichter, Bogard & Denton.
Lauren Bartlett, an Edison spokeswoman, wrote in an e-mail the three mutual funds cited in the case were removed from the 401(k) plan lineup “years ago,” and that “courts have found that we satisfied our duty of loyalty to plan participants.” The Supreme Court ruling “does not question our loyalty to plan participants,” Ms. Bartlett added.
