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Northwest OH Legal Blog

Wednesday, August 12, 2015

401(k) Lawsuits by Participants Have Been Made Easier by Supreme Court

A recent U.S. Supreme Court decision has made it easier for participants in 401K Plans and other defined contribution plans to sue their plans for offering investments with excessive fees.

In a unanimous decision written by Justice Breyer, the court ruled in favor of current and former workers of Edison International, a public utility holding company based in Rosemead, Calif., who claimed that six retail-class mutual funds selected by plan fiduciaries as investment options were imprudent because they charged higher fees than identical institutional-class funds that were allegedly available to large investors, such as the defendant Edison International’s 401(k) plan..

The case is Tibble v. Edison International. In Tibble, Plan fiduciaries selected three retail-class funds as plan investment options in 1999, more than six years before plan participants filed a lawsuit claiming the investment choices were imprudent. According to the attorney for the Plaintiffs, the Tibble decision is a clear victory for plaintiffs, because the Supreme Court has confirmed that the six-year statute of limitations is not an absolute bar to a legal action with respect to the selection of investment options.

Under ERISA, employer-sponsored retirement plans have a fiduciary responsibility for selecting and monitoring appropriate investments, as well as removing investments that no longer fit criteria established in an investment policy statement..

Essentially, the Supreme Court found that plan fiduciaries are required to conduct regular reviews of plan investments

Studies have shown that investment costs can adversely impact portfolio balances. According to one Vanguard study, an investor who starts out with a $100,000 nest egg would have 30 years later $574,349 when assuming no investment costs, $523,899 with annual costs of 0.25%, and just $438,976 with annual costs of 0.9%.

Rather than a case where a poorly performing investment was allowed to remain on a plan investment menu,, the alleged violation involves the nature of the investment itself, specifically retail-class mutual funds that are usually, but not always, more expensive than comparable institutional-class funds.

The case also involved the Employee Retirement Income Security Act's (ERISA) six-year statute of limitations.  The court found the claim was not barred by the six year statute of limitations. Because a fiduciary normally has a continuing duty to monitor investments and remove imprudent ones, a plaintiff may allege that a fiduciary breached a duty of prudence by failing to properly monitor investments and remove imprudent ones. Such a claim is timely as long it is filed within six years of the alleged breach of continuing duty.

This case involves the duty of the trustees of pension plans to manage the assets of those plans with “prudence.” The question is whether the trustees need to worry that an investment that was “prudent” when the trustees first made it will become “imprudent” because of future changes. If so, that means that the trustees must continuously monitor all the assets that they own, to make sure they don’t need to sell any of them. The Court held that the trustees do have that continuing duty to monitor.

Some quotes from the case convey the court’s views:

“Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

“The trustee must systematically consider all the investments of the trust at regular intervals to ensure that they are appropriate.”

“When the trust estate includes assets that are inappropriate as trust investments, the trustee is ordinarily under a duty to dispose of them within a reasonable time.”

The Supreme Court's found that that the nature and timing of this review are contingent on the circumstances.  Justice Stephen Breyer did not state a view on whether a review should have taken place in Tibble or what kind of review would have been required if, in fact, a review had been needed.

The case was remanded to the 9th Circuit to determine more specifically to what extent fiduciaries must look at plan investments in order to satisfy their monitoring duty.

The Labor Department has published education materials to help workers better evaluate their 401(k) plan fees. 


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