Experts See Big Stakes in SCOTUS Review of Tibble

The case is considered by industry observers to be the first “excessive fee” litigation to reach the country’s top court. Nancy Ross, a partner at corporate and employee benefits law firm Mayer Brown, tells PLANADVISER that Tibble v. Edison should be followed closely by plan sponsors, advisers and service providers throughout the retirement planning industry—indeed, by all who carry a fiduciary status for the plans they serve.

The majority opinion and how broadly it is constructed could significantly expand fiduciary liability and the potential for plan participants to file “hugely disruptive” fiduciary breach claims under the Employee Retirement Income Security Act (ERISA), Ross says. The other outcome would be important affirmation of the ERISA limitations period, she explains, through which employers and plan sponsors gain important protections from costly litigation.

By way of background, Tibble v. Edison International reached the Supreme Court following an initial bench trial in which a district court held that utility company Edison International had breached its duty of prudence by offering retail-class mutual funds as plan investments when identical lower-cost institutional funds were available. But the court subsequently limited that holding to three mutual funds that had first been offered to plan participants within the six-year limitations period expressly programmed into ERISA—meaning mutual funds placed on the plan menu more than six years before the date of the ERISA-based complaint were excluded from the decision.

Tibble and counsel appealed that ruling to the 9th Circuit, but the appeals court upheld the district court’s decision to limit the settlement to the three mutual funds adopted within the ERISA limitations period. This led to a final (and successful) appeal attempt from Tibble, endorsedby the U.S. Solicitor General, asking the Supreme Court to weigh in on whether such claims should be time-barred. According to Tibble and counsel, if the limitations period is allowed to apply in this case, it effectively eliminates the plan sponsor’s duty to monitor and review funds placed on their plan’s investment lineup more than six years ago.

According to case files on SCOTUSblog, the Supreme Court says it is limiting its review to the following question: "Whether a claim that ERISA plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U. S. C. §1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed."

Ross says that, in deciding this issue, it’s very likely the court will need to make an “important and potentially far-reaching statement” about how ERISA’s six-year limitations period should be applied generally by plan fiduciaries and service providers. For her part, Ross says she would remind the Supreme Court that the limitations period is “a key part of the critical balancing act that is at the foundation of ERISA.”

“I would urge the court to remember that one of the primary purposes of ERISA is to balance the critical requirement for employers to provide the benefits they promise, while also giving plan sponsors enough latitude to actually design plans in accordance with the needs of the business,” she explains. “Also, ERISA is there in part to prevent plan fiduciaries from being constantly subject to ongoing, never-ending fiduciary breach claims.”

Ross also argues that the Supreme Court should consider that plan sponsors have no obligation to provide retirement benefits in the first place. “We live in a country where we have a privatized system of retirement benefits for a lot of people, and the Supreme Court has urged the lower courts time and time again not to issue opinions that will be tremendously onerous on employers and plan sponsors,” she explains. “We don’t want employers just cutting out their retirement benefits as a response to all of this.”

Further, Ross says the Supreme Court could bring itself into contention with the clear will of Congress should it decide in favor of the plaintiffs in Tibble.

“The fact that Congress included one statute of limitations for all of ERISA is very significant—it shows the Congress was very concerned about leaving plan fiduciaries overly exposed to ‘stale claims,’ and also the potential disruption of those claims in running the plan, and the tremendous potential cost of defending against these claims ad inifinitum,” Ross adds. “And that is really the driving policy behind having a limitations period expressly written into ERISA. It says clearly and directly that no claim shall be brought later than six years after the last act that caused an alleged breach.”

Jamie Fleckner, a partner in and chair of Goodwin Procter's ERISA Litigation Practice, agrees that it is important for the retirement planning industry to follow what the Supreme Court does with Tibble.

“As I read it, the specific question the court will review is a somewhat narrow one,” he tells PLANADVISER. “It has primarily to do with the application of the six-year statute of limitations. That's an important issue, but if it truly confines itself to just that question, we might not learn too much about what the Supreme Court thinks about all these ongoing fee cases.”

However, Fleckner says it’s also possible that the court will use its decision on Tibble to signal a wider opinion of fee litigation. And in any case, the limitations period is a key concept in terms of limiting fiduciary liability under ERISA, he says.

“I’m thinking back to the last term when the court took on the Fifth Third Bank v. Dudenhoeffer stock drop case,” he says. “In that case, the court also limited its review to a narrow question, on the presumption of prudence for ESOP [employee stock ownership program] fiduciaries, but we learned a good deal in the text of the decision about what the court thinks about stock drop cases more generally.”

Fleckner largely agreed with Ross’ assessment that the Supreme Court could do more harm than good for retirees should it side with Tibble and counsel.  He says that employers could become quite worried if they perceive expanded fiduciary liability coming out of Tibble, given how challenging it already is to run a compliant retirement plan.

“I think that what the petitioners and the government, via the Solicitor General, are arguing in this case is erroneous,” he says. “Their position has some appeal superficially, but what I think the government and the plaintiffs have failed to appreciate is that, if they’re right, then the statute of limitations doesn’t mean anything under ERISA. They would have the ongoing duty to monitor trump completely the statute of limitations that Congress decided to include in ERISA. I think their position is far from convincing.”

Fleckner says the plaintiffs in Tibble contend that their argument isn’t as much about the initial selection of the retail-class funds as it is about the continuing use of the funds on the menu over time. But this stance has a critical flaw, Fleckner says, because various circuit courts have already actively shied away from establishing a class of “ongoing violations” of fiduciary duty—opting instead for an approach that looks at key events or changes in an investment option that could restart the ERISA limitations period.

“Tibble’s complaint does not identify any key differences or changes that have occurred between the time that the fiduciaries selected the retail-class funds and the situation in subsequent years, when the complaint was filed,” he explains. “In effect, this makes the Tibble challenge a blanket attack on the long-standing industry practice of permitting retail share classes. So in this particular case, their appeal to this idea of a continuing violation is the same as to challenge the original selection of the fund, and we feel that should clearly be barred by the limitations period.”

Another compelling piece of evidence supporting the defendant, Edison International, Fleckner says, is the fact that the case went to trial on other matters before the resolution of the statute of limitations question, and in the review of those other matters there was ample evidence that emerged of ongoing review by the plan sponsors of the investment options challenged by Tibble.

“It’s on record now that the fiduciary committee met regularly,” he explains. “They also retained an outside consultant, and they continued to engage in a process through which they reviewed the funds and the menu as a whole. To me, this really undercuts the plaintiffs’ argument that there was a lack of diligence on the part of the plan fiduciaries.”