High Court Paves Way for 401(k) Litigation, Reverses Trend of Finding Lawsuits Untimely

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By Jacklyn Wille

May 18 — The U.S. Supreme Court made it easier for 401(k) plan participants to bring lawsuits challenging high-cost investment options added to the plan more than six years before a lawsuit was filed.

In a unanimous ruling by Justice Stephen G. Breyer on May 18, the court rejected the view recently adopted by three federal appellate courts, which found lawsuits challenging plan fees to be untimely under the Employee Retirement Income Security Act when they involved investments added to plans more than six years before a given lawsuit.

According to Breyer's majority opinion, courts can't dismiss these challenges without first considering whether plan fiduciaries fulfilled their duty to monitor those investments during the relevant six-year window.

“A plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones,” the court held. “In such a case, so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely.”

However, the court explicitly declined to articulate what this continuing duty to monitor looks like, leaving this question for lower courts.

In barring lower courts from rejecting outright any lawsuit based on older investment options, the Supreme Court removed a huge roadblock that previously derailed many plan fee challenges brought under ERISA.

In particular, the U.S. Courts of Appeals for the Fourth, Ninth and Eleventh Circuits have all issued recent opinions protecting plan fiduciaries from these types of claims. In these rulings, the courts found that plan participants challenged the initial selection of high-cost funds—which occurred outside ERISA's statute of limitations—rather than any subsequent failure to monitor or remove the funds that might have occurred within the six-year window (David v. Alphin, 704 F.3d 327, 54 EBC 2437 (4th Cir. 2013)); Tibble v. Edison Int'l, 711 F.3d 1061, 56 EBC 1245 (9th Cir. 2013); Fuller v. SunTrust Banks, Inc., 744 F.3d 685, 57 EBC 2089 (11th Cir. 2014).

Both plaintiff- and defense-side attorneys expressed little surprise at the Supreme Court's decision, calling it “what everyone expected.”

The participants' attorney, Jerome J. Schlichter of Schlichter, Bogard & Denton LLP in St. Louis, praised the court's ruling in a May 18 press release, saying, “On behalf of Edison employees and all Americans who rely on 401(k)s for their retirement, we are very pleased with this historic and landmark, unanimous decision by the Supreme Court. Going forward, this decision will be of great significance for American workers and retirees for generations to come, as the 401(k) plan has become America’s retirement system.”

Attorneys: Few Surprises 

Gregory Y. Porter, a plaintiff-side ERISA attorney and partner with Bailey & Glasser LLP in Washington, told Bloomberg BNA that the court's ruling was “what everyone expected” and “what almost everyone knew the law to be.”

Porter also said he was glad that the ruling was unanimous, pointing out that the court's recent decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459, 58 EBC 1405 (U.S. 2014) was also a unanimous ERISA ruling “sweeping away prevailing circuit law in favor of beneficiaries.”

James O. Fleckner, a defense-side ERISA attorney and partner in Goodwin Procter LLP's Boston office, agreed that the opinion wasn't “entirely surprising,” although he expressed some surprise that the justices declined to elaborate on what the fiduciary duty to monitor might involve.

“They really don't provide guidance to the lower courts as to what that duty entails,” Fleckner told Bloomberg BNA. “Maybe I shouldn't be surprised by that, because the record wasn't as developed on that particular point as the justices seemed to want.”

Andrew L. Oringer, a partner in Dechert LLP's New York office who represents plan sponsors and fiduciaries, also found the decision to be in line with expectations.

“I am not surprised that the Supreme Court has effectively preserved a six-year period for bringing claims for a failure to monitor adequately,” Oringer told Bloomberg BNA. “To me, the only real question was whether the court would impose a requirement that there be some kind of factual change within the six-year period, but I am not surprised that they ultimately did not impose a condition like that. The court did clearly confirm a duty to monitor regarding fund selections.”

Praise From Plaintiffs' Lawyers 

James. A. Moore, a partner with McTigue Law LLP in Washington, said he was “delighted” with the court's “broadly worded unanimous opinion,” which he said “effectively reverses” decisions in three separate courts of appeals.

According to Moore, the Supreme Court's decision “re-affirmed the understanding of the law that existed before those decisions: that ERISA fiduciaries have a continuing duty to monitor investments and remove imprudent or otherwise improper ones, and that a claim for breach of that duty is timely if it concerns a failure to remove within the limitations period.”

Moore, who represents plan participants, further praised the ruling by saying that “ERISA plan participants can now rest easier knowing that they will not be locked into imprudent investments in 401(k) plans, without legal recourse, simply because six years have passed since their initial selection.”

Karen L. Handorf, a plaintiff-side ERISA attorney and partner with Cohen Milstein Sellers & Toll PLLC in Washington, also praised the ruling for strengthening workers' retirement security.

“The decision re-affirms that plan fiduciaries are held to the stringent standards of trust law when managing plan investments and have a continuing obligation to monitor and to remove plan investments that are inappropriate for a retirement plan,” Handorf told Bloomberg BNA. “The decision strengthens the retirement security of ERISA plan participants by sending a strong message to plan fiduciaries that their duties do not end once an investment is made.”

Limited Effect on Fiduciaries?

Although the court's decision appears in large part to be a victory for plan participants, Oringer said he didn't think it would be a big game changer for plan fiduciaries and the way they fulfill their monitoring duties.

“I think most employers and committees have been taking their monitoring responsibilities seriously in any event, so I do not think that Tibble will necessarily be troublesome for them as a practical matter,” Oringer said.

Porter expressed a somewhat different viewpoint.

“The courts will now turn to examining standards of care for monitoring,” he said. “There's a lot of best practices information and counseling to consider.”

Fleckner agreed that many plan fiduciaries have already implemented good monitoring practices, noting that the judicial record in Tibble demonstrated that even the Edison fiduciaries had been monitoring plan investments.

“I don't expect this decision to change fiduciary practices,” Fleckner said.

More Litigation Coming?

Fleckner also noted the possibility that this ruling could spur an increase in litigation over fees paid by ERISA plan investments.

“I can see more litigation coming out of this,” Fleckner said. “I do think this could have a short-term effect of emboldening some plaintiffs' lawyers.”

David C. Olstein, counsel with Skadden, Arps, Slate, Meagher & Flom LLP's New York office, agreed that the ruling was likely to result in additional litigation, but he found one aspect of the decision that can be seen as pro-defendant.

“By recognizing that a fiduciary’s duty to monitor investments and remove imprudent investments is separate and apart from the duty to exercise prudence in selecting investments, the Supreme Court implicitly rejected ‘continuing breach' theories of recovery that would allow a plaintiff to recover investment losses,” Olstein said.

Porter, Fleckner, Oringer, Moore, Handorf and Olstein weren't involved in the Tibble litigation.

Limitations Period Not Automatic Bar 

This dispute, filed by participants in Edison International's 401(k) plan, came by way of the Ninth Circuit, which rejected certain of the participants' challenges to high-cost plan investment options as being filed too late.

In particular, the Ninth Circuit found that the participants' allegations of high plan fees actually challenged the initial selection of certain investment options, rather than any failure by the Edison fiduciaries to monitor or remove those investments during the six-year window.

The Ninth Circuit used ERISA's statute of limitations to bar these claims after finding that the participants didn't adequately allege that any change in circumstances occurred during the six-year window that would have obligated the fiduciaries to take action.

In his opinion for the Supreme Court, Justice Breyer admonished the Ninth Circuit for applying such a categorical bar “without considering the nature of the fiduciary duty.”

Breyer said that the Ninth Circuit's opinion failed to recognize that trust law requires fiduciaries to “conduct a regular review of its investment.”

“Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones,” Breyer wrote. “This continuing duty exists separate and apart from the trustee's duty to exercise prudence in selecting investments at the outset.”

Scope of Duty?

Despite affirming plan participants' right to challenge a fiduciary's failure to monitor plan investments, the Supreme Court expressed no opinion on what this duty might look like in practice.

Instead, the Supreme Court left it up to the Ninth Circuit on remand to consider whether the Edison fiduciaries engaged in the type of ongoing monitoring practices that would satisfy their duties under ERISA.

The only guidance the justices offered to lower courts was to recite ERISA's general standard of fiduciary prudence, which requires fiduciaries to discharge their duties “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use.

Litigation History 

The lawsuit originated in the U.S. District Court for the Central District of California, which certified the participants' claims as a class action in June 2009.

That court ultimately ruled in favor of Edison on claims of improper revenue sharing, before finding that Edison fiduciaries breached their duties by selecting retail-class mutual funds for the plan without considering whether institutional-class funds with lower fees were available.

After receiving amicus briefs from both the Department of Labor and a California employers organization, the Ninth Circuit issued a mixed ruling in March 2013, affirming the district court's reasoning with respect to retail-class funds.

The Ninth Circuit later amended that ruling in August 2013, clarifying the standard of judicial review applicable to fiduciaries' interpretation of plan terms.

Although the lower courts issued rulings on a variety of issues, the Edison plan participants petitioned the Supreme Court to weigh in on two narrow questions—proper application of the statute of limitations, and the level of judicial deference applicable to a fiduciary accused of violating plan terms.

The Supreme Court asked the U.S. solicitor general to weigh in, and the solicitor encouraged the justices to grant review of the statute of limitations question only.

The justices took the solicitor's advice and agreed to weigh in only on the statute of limitations issue.

The solicitor later urged the court to uphold plan fiduciaries' duty to monitor investment, and the court ultimately received eight competing amicus briefs debating both sides of the issue.

The court heard oral arguments on Feb. 24, shifting the focus of the case from ERISA's statute of limitations toward the contours of the fiduciary duty to monitor plan investments.

In recent months, attorneys have predicted that the court's ultimate ruling would focus more on fiduciary duties than the narrow statute of limitations question the court initially decided to hear.

The participants were represented by David C. Frederick, Brendan J. Crimmins and Jeremy S. Newman of Kellogg, Huber, Hansen, Todd, Evans & Figel PLLC, Washington, and Jerome J. Schlichter, Michael A. Wolff and Sean E. Soyars of Schlichter, Bogard & Denton LLP, St. Louis.

Edison International was represented by Jonathan D. Hacker, Anna-Rose Mathieson, Ward A. Penfold, Gabriel Markoff, Brian Y. Chang, Walter Dellinger, Brian D. Boyle and Meaghan VerGow of O'Melveny & Myers LLP, Washington and San Francisco, and Sergey Trakhtenberg of Southern California Edison Co., Rosemead, Calif.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

Text of the opinion is at http://www.bloomberglaw.com/public/document/Tibble_v_Edison_Intl_No_13550_US_May_18_2015_Court_Opinion.