An employer has fiduciary duties with respect to the 401(k) plan it provides its employees. Those duties include the obligation to choose prudent investment options and to consider the fees associated with service providers and plan investments. However, an employer’s fiduciary duties do not end there. Employers must continually monitor the investment options in their 401(k) plans and remove any funds and investment options that are imprudent, i.e., that may have been reasonable options when initially included in the plan but that are no longer prudent. Failure to do could result in liability to the employees, who are the beneficiaries of the 401(k) plan. A recent unanimous decision by the U.S. Supreme Court, Tibble v. Edison Int’l, No. 13-550, slip op. (U.S. Feb. 24, 2015), is instructive.
In Tibble, the plaintiff employees alleged that their employer had breached its fiduciary duty by including in its 401(k) plan certain mutual funds with administrative costs that were too high. The plaintiffs specifically alleged that the employer imprudently included “higher priced retail-class mutual funds as Plan investments when materially identical lower priced institutional-class mutual funds were available.” Slip op. at 2. The defendant employer argued that the plaintiffs’ claims were barred under ERISA’s six-year statute of limitations because the employer had initially included the subject funds in the 401(k) plan more than six years before the plaintiffs had filed their complaint.
Both the district court (C.D. Cal.) and the Ninth Circuit agreed with the employer that the plaintiffs’ claims were barred by ERISA’s statute of limitations. The Ninth Circuit specifically ruled that the employees had not demonstrated a “change in circumstances that might trigger an obligation to review and to change investments within the 6-year statutory period.” Id. at 3. The Supreme Court disagreed and reversed. The Court specifically rejected the Ninth Circuit’s premise that an employer would not have a duty to review and change investments unless a significant change in circumstances had occurred. Instead, the Supreme Court emphasized that in addition to “the trustee’s duty to exercise prudence in selecting investments at the outset,” the trustee has another, separate and “continuing duty to monitor trust investments and remove imprudent ones.” Id. The Supreme Court premised its conclusion on trust law, specifically, that “under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.” Id. at 5. Based on these principles, the Court ruled that a “plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones . . . [and] so long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely.” Id.
In remanding the case to the Ninth Circuit, the Supreme Court made crystal clear that employers have a fiduciary duty to continually monitor 401(k) investment options. However, the Court expressly declined to provide any guidance as to the scope of that fiduciary duty. Thus, the issue of what an employer specifically must do to “properly monitor investments and remove imprudent ones” remains for another day; presumably, the Ninth Circuit will address it on remand.
In light of the Supreme Court’s decision in Tibble, an employer must do more than just choose prudent investments for its 401(k) plan. The employer should also institute policies, procedures and mechanisms to continually monitor the investment options and to remove any that are no longer prudent.