In what is undoubtedly a victory for beneficiaries of ERISA-regulated plans, the United States Supreme Court enlarged the duty of prudence owed by plan fiduciaries to plan beneficiaries and also broadened the statute of limitations applicable to claims alleging a breach of this duty in Timble v. Edison International, 575 U.S. ___ (2015). While the duty of prudence previously arose when selecting investments, the Supreme Court, through the Timble decision, expressly expanded that duty to include the duty to monitor and remove imprudent investments.
In the Timble decision, several individual beneficiaries of an ERISA-regulated plan brought suit in 2007 alleging that plan fiduciaries breached their fiduciary duty in 1999, and again in 2002, when they added three higher priced retail-class mutual funds as 401(k) investments when materially lower priced institutional-class mutual funds were available. Although agreeing with the beneficiaries’ argument regarding the mutual funds added in 2002, the United States District Court held (a holding which was affirmed by the United States Court of Appeals for the Ninth Circuit) that the six-year statute of limitations under ERISA had run with regard to the mutual funds added in 1999. According to the lower courts, although the fiduciaries owed a duty to exercise prudence in selecting an investment, the 1999 selections had occurred more than six years prior without any significant change in circumstances and so the claim was time barred.
The Supreme Court disagreed with the holdings of the District Court and the Court of Appeals for the Ninth Circuit. The Supreme Court determined that, in addition to the duty to exercise prudence in selecting investments, ERISA fiduciaries also owe a “continuing duty to monitor trust investments and remove imprudent ones.” This duty to monitor arises under well-established trust law, as explained by the Supreme Court. Although it refused to detail the contours of the continuing duty to monitor, the Court advised that a fiduciary must “discharge his responsibilities ‘with the care, skill, prudence, and diligence’ that a prudent person ‘acting in a like capacity and familiar with such matters’ would use.” (quoting ERISA, 29 U.S.C. § 1104(a)(1)).
Having elaborated on the continuing duty owed, the Supreme Court then determined that the relevant point in time, for purposes of measuring the six-year statute of limitations, was when the alleged breach had occurred. “[S]o long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely.” With this direction, the Supreme Court remanded the case back to the Court of Appeals to determine the factual questions of whether the fiduciaries in Timble had appropriately fulfilled their duty to monitor and, related, whether any breach of that duty had occurred less than six years prior to the filing of the lawsuit.
In light of the Timble decision, plan fiduciaries should be cognizant of their newly-expanded duty of prudence, which now includes the continuing duty to monitor plan investments and to remove imprudent ones. In other words, plan fiduciaries should periodically review investment options as to their performance versus similar investment vehicles, as well as the costs associated with the investment vehicle. Plan fiduciaries should also ensure that the types of investments offered to beneficiaries are permitted by the pertinent plan documents.