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Compliance December 11, 2014
Solicitor General Argues for Reversal of Tibble Decision
A brief submitted by the U.S. Solicitor General to the
United States Supreme Court argues in favor of plaintiffs in Tibble v. Edison International—a case that could have implications for retirement plan sponsors' ongoing duty to monitor investments.
Reported by John Manganaro
The brief argues that the plaintiffs’ claims for breaches of fiduciary duty are timely because “they are claims for breaches of the duty of prudence within the limitations period.” This is a critical issue in the case, which reached the Supreme Court from the 9th U.S. Circuit Court of Appeals on a question of whether damages assessed against utility company Edison International for failing to pursue cheaper share classes for mutual funds offered as retirement plan investments should be limited only to those funds added to the investment menu within the Employee Retirement Income Security Act’s (ERISA’s) six-year statute of limitations period.
The brief says “the Investment Committees (Edison International Trust Investment Committee and Trust Investment Subcommittee) were not informed about the institutional share classes and did not conduct a thorough investigation” of fund fees. According to the Solicitor General, these facts “establish breaches of the ongoing duty of prudence within the limitations period, because a prudent fiduciary would have considered whether institutional-class funds were available and would have offered those funds to save money for plan participants.”
Additionally, the brief says the 9th Circuit misunderstood the claims and that the lower courts’ rulings, if allowed to stand, could have a greatly adverse effect for participants in and beneficiaries of ERISA retirement plans.
Case documents show that, during the initial bench trial, a district court held that utility company Edison International had breached its duty of prudence by offering retail-class mutual funds as retirement plan investments when lower-cost institutional funds were available. But, the court limited that holding to three mutual funds that had first been offered to plan participants within the six-year statute of limitations period under ERISA—meaning mutual funds placed on the plan menu more than six years before the date of the complaint were excluded from the decision.
The decision was appealed to the 9th Circuit, which upheld the district court’s decision to limit the settlement to the three mutual funds adopted within the ERISA limitations period. This led to the Solicitor General’s first brief, in which the government’s chief appellate lawyer sided with Tibble on the argument that such claims should not be time-barred.
Some in the retirement planning industry see big stakes in the case, suggesting a ruling in favor of the plaintiffs could significantly expand fiduciary liability and the potential for plan participants to file disruptive fiduciary breach claims under ERISA. Others say the sky won’t fall for plan sponsors and employers if the limitations period is found not to apply in this case.
In a recent conference call, one ERISA specialist said the real issue at hand in Tibble v. Edison has less to do with the strength or weakness of the ERISA limitations period than many in industry and media have suggested. As Fred Reish, an attorney with Drink Biddle & Reath and leader of the firm’s ERISA practice, explains, “the true issue before the Supreme Court is whether there is a discreet and ongoing duty to monitor investments that is distinct from the initial duty to select.”
“The trial court and the 9th Circuit, consistent with other appeals courts, ruled that once the six-year window has gone by from when an investment was selected, there is no continuing duty to monitor,” Reish explains. “As the decision stands, the duty to monitor doesn’t start that limitation period again each year, it doesn’t keep rolling that way. So once six years go by from the initial fund selection, the fiduciaries are safe from plaintiffs seeking damages.”
Reish says the lower court rulings create some tension between the plan sponsor community, which wants to have protection from costly litigation, and the financial adviser and ERISA consultant community, which for years has been preaching that there is a distinct and serious duty to monitor.
“If this goes if favor of the defendants it will eliminate or substantially reduce the ongoing duty to monitor,” Reish notes. “In this sense, again, the question before the Supreme Court is not really a statute of limitations question, as some have interpreted. The real question is whether there is an independent duty to monitor that has its own six-year statute of limitations, such that every year the failure to monitor starts a new limitation period, and the sponsor can then be sued on at any point in the next six years once a failure to monitor has occurred.”
Reish urges both the plan sponsor and adviser communities to “watch this very carefully, because it could diminish the perceived value of advisers if the Supreme Court says there is no legal separation between the ‘ongoing duty to monitor’ and the original decision to select.”
On the other hand, he warns, if the Supreme Court says there is a separate ongoing duty to monitor that exists as its own separate legal entity, and that the statue of limitations runs on this ongoing duty independent of the initial selection, it would effectively reinforce the importance of monitoring and could enhance the value of advisers.
“And then there could be an inside position,” he says, “which would say something like, the duty to monitor is not generally a separate duty, but on occasions it can be. And then the Supreme Court could define or outline what some of those cases are.
“Hold on to your seats,” he concludes, “because it’s going to be significant.”
The text of the Solicitor General's new brief is here.