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


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 (Tibble v. Edison Int'l, U.S., No. 13-550, 5/18/15).

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, (4th Cir. 2013); Tibble v. Edison Int'l, 711 F.3d 1061, (9th Cir. 2013); Fuller v. SunTrust Banks, Inc., 744 F.3d 685, (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, (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.”

Excerpted from a story that ran in Pension & Benefits Daily (05/18/2015).

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