Justices Wrangle With Monitoring Duties of 401(k) Fiduciaries During Oral Arguments


When fiduciaries of 401(k) plans periodically monitor the plan's investments, what should they look for—glaring changes in circumstances, or the mere existence of cheaper investment options.

This was the question dividing justices and litigants when the U.S. Supreme Court heard oral arguments Feb. 24 in a case involving the time frame in which plan participants can challenge their plan's investment options (Tibble v. Edison Int'l, U.S., No. 13-550, argued 2/24/15).
The case at the heart of this dispute asks whether 401(k) participants can hold fiduciaries liable for including higher-cost investment funds in the plan when those funds were initially chosen more than six years before the lawsuit. In recent years, three federal appellate courts have ruled in favor of plan fiduciaries in these disputes, finding that the participants' claims were barred by the six-year limitations period found in the Employee Retirement Income Security Act.

This six-year limitation has become a huge roadblock for retirement plan participants challenging higher-cost funds, because many funds remain in retirement plans for years after their initial selections.

During arguments, the justices appeared most interested in deciphering the differences in the opposing parties' positions. While both sides appeared to agree that plan fiduciaries had some ongoing duty to review a plan's investment options, the extent of that duty—along with the circumstances that would obligate a fiduciary to remove higher-cost investments in favor of lower-cost ones—remained murky.

Plaintiff-Side Attorneys Weigh In

Gregory Y. Porter, a partner with Bailey & Glasser LLP, who filed an amicus brief on behalf of Cambridge Fiduciary Services LLC in this case, told Bloomberg BNA Feb. 24 that the justices “struggled a bit to understand what prudent monitoring looks like.”

However, he added that they seemed to “reach consensus that trial courts should develop the standards and that laying out a standard was not necessary to reversing the Ninth Circuit.”

Porter, who typically represents plan participants, also took issue with some of the arguments raised by defense counsel about how onerous it can be for plan fiduciaries to switch the plans' investment funds.

“Fiduciaries periodically switch funds for a variety of reasons,” Porter said. “I have never seen a plan committee—and I've seen a lot of plan committee minutes—discuss the burdens of switching as compared to the fee savings for replacing a fund. That's not to say it shouldn't be a consideration, but it's not a consideration that I have observed in practice.”

He added that the cost of switching funds “is almost always going to be dwarfed by the future fee savings.”

In a joint e-mail to Bloomberg BNA, Karen L. Handorf and Michelle C. Yau of Washington-based Cohen Milstein Sellers & Toll PLLC said that the justices' questions during oral arguments “demonstrated their appreciation of the significant impact fees have on the retirement security of American workers."

“While the court's questioning probed the parameters of the duty to monitor, the justices and both parties appeared to agree that the duty of prudence included a duty to monitor plan investments. Justice Kennedy got it right when he noted, during the argument, that the inquiry is dictated by what a prudent fiduciary under the same circumstance would do. There is no bright line test.”

Handorf and Yau, who typically represent plan participants, filed an amicus brief in the instant case on behalf of the Pension Rights Center. 

Excerpted from a story that ran in Pension & Benefits Daily (02/23/2015).

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