The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By Craig C. Burke, Esq., Jasmin N. French, Esq., and John Zollo, Esq.
Ice Miller LLP, Indianapolis, IN
The U.S. Supreme Court recently vacated a Ninth Circuit ruling which held that an Employee Retirement Income Security Act (ERISA) claim (a class action suit filed by employees alleging that 401(k) plan fiduciaries breached their duty of prudence by selecting retail investment funds as opposed to lower-cost institutional funds) was time-barred because the initial selection of imprudent investments was made more than six years prior to the employees' lawsuit. In Tibble v. Edison International, 135 S. Ct. 1832 (2015), the Supreme Court ruled that a running of a new limitations period begins each time a fiduciary fails to review and remove imprudent investments.
Edison International had been offering retail-class mutual funds as part of its 401(k) plan even though otherwise identical institutional class funds (that charged a lower fee) were available. In 2007, Edison employees sued for damages and, to avoid being time-barred, claimed that the inclusion of the higher cost funds was a "continuing violation" of ERISA. The plaintiffs contended that the fiduciaries had a continuing duty of prudence which extended to reassessing the investment decisions it made.
The Ninth Circuit rejected the employees' claim as untimely on the basis that Edison selected the mutual funds at issue more than six years before the employees filed the lawsuit. In its analysis, the Ninth Circuit focused on "the act of designating an investment for inclusion," which started the clock on the six-year statute of limitation period.
Supreme Court Holding
The Supreme Court considered whether ERISA's six-year statute of limitations barred a claim that plan fiduciaries breached their fiduciary duties when they made allegedly imprudent investment decisions more than six years before the claim was filed. In vacating the Ninth Circuit's ruling, the Supreme Court held that the court "erred by applying [ERISA's] statutory bar to a breach of fiduciary duty claim based on the initial selection of the investments without considering the contours of the alleged breach of fiduciary duty." An ERISA fiduciary's duty of prudence derives from trust law where there is a continuing duty to exercise judgment extending from the selection of investments to monitoring and removing imprudent investments. Ultimately, the Supreme Court held that so long as any such breach occurred within six years of the lawsuit, the claim was timely.
1. The trustee or responsible plan fiduciary has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the duty to exercise prudence in selecting investments at the outset.
2. The six-year statute of limitations for fiduciary breach related to an imprudent investment does not necessarily end six years from the date of the initial selection of the investment.
3. Fiduciaries should systematically consider all investments at regular intervals to ensure they are appropriate.
For more information, in the Tax Management Portfolios, see Wagner, 374 T.M., ERISA — Litigation, Procedure, Preemption and Other Title I Issues, Horahan and Hennessy, 365 T.M., ERISA — Fiduciary Responsibility and Prohibited Transactions,and in Tax Practice Series, see ¶5590, Other Laws and Considerations Affecting Employee Benefit Plans, ¶5530, Fiduciary Duties and Prohibited Transactions.
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