Employers Take Note: ERISA Lawsuits are on the Increase
The Employee Retirement Income Security Act (ERISA) was created on September 2, 1974. The purpose of the ERISA benefits law was to ensure that workers’ pensions were protected. Under the law, employees who feel that their ERISA rights and protections have been violated can file an ERISA lawsuit to protect their rights. ERISA suits have become prolific.
The law requires that employers act as fiduciaries for employees and protect the employer sponsored and controlled retirement plan.
An overview of recent the Supreme Court case of Tibble v Edison International underscores the potential prolific nature of ERISA suits concerning plan fiduciaries obligations to continually monitor investments. In a unanimous vote in May the Supreme Court decided Tibble v Edison International, 575 U.S. ___ (2015), and overturned a Ninth Circuit Court ruling wherein the Court had held that the ERISA law’s six year statute of limitations barred claims by pension plan participants. The question considered by the Supreme Court was: “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. section 1113 (1) when fiduciaries initially chose the higher-cost mutual funds plans investments more than six years before the claim was filed.”
In Tibble, the plaintiffs were beneficiaries in Edison International’s 401 (k) saving Plan (Plan) and they sued Plan fiduciaries seeking damages for losses allegedly suffered by the Plan for alleged breaches of Plan fiduciaries when they “acted in imprudently” by adding three mutual funds to the Plan in 1999 and three mutual funds to the Plan in 2002 which were “higher priced retail class mutual funds” when materially identical lower priced institutional-class mutual funds were available.
The District Court held that the plaintiffs’ complaint, filed in 2007, as to the 1999 funds was untimely because they were in¬cluded in the Plan more than six years before the complaint was filed, and the circumstances had not changed enough within the six year statutory period to place the Plan fiduciaries under an obligation to review the mutual funds and to convert them to lower priced institutional-class funds. The Ninth Circuit affirmed, concluding that plaintiffs had not established a change in circumstances.
The Supreme Court held that the Ninth Circuit erred by applying §1113’s statutory bar to breach of fiduciary duty claim based on the initial selection of the investments without considering the contours of the alleged breach of fiduciary duty. The Court also noted ERISA’s fiduciary duty is “derived from the common law of trusts,” Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U. S. 559, 570, (1985) which provides that a trustee has a continuing duty—separate and apart from the duty to exercise prudence in selecting investments at the outset—to monitor and remove imprudent, trust investments.
So long as a plaintiff’s claim alleging breach of the continuing duty of prudence occurred within six years of the suit, the claim is timely. The Supreme Court expressed “no view on the scope of respondents’ fiduciary duty in this case, e.g., whether a review of the contested mutual funds is required and, if so, just what kind of review. 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. §1104(a)(1).”
The Court went on to note:
An ERISA fiduciary must discharge his or her responsibility “with the care, skill, prudence and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use. §1104(a)(1); see also Fifth Third Bancorp v. Dudenhoeffer, 573 U. S. ___ (2014). In determining the contours of an ERISA fiduciary’s duty, courts often must look to the law of trusts. We are aware of no reason why the Ninth Circuit should not do so here.
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 impact of Tibble will be to compel Plan fiduciaries to monitor fees charged by investment funds and to provide some impetus for fiduciaries to go back and look at the plan's investment policy statement and make sure there is a thorough and well-documented review of investment options since if the fiduciaries fail to do that, they will not able to limit their liability exposure to the last six years.
Weber Gallagher Partner Richard K. Tavani (pictured) defends insurance carriers, self-insured entities and third-party administrators in workers’ compensation and general liability matters. He may be reached at email@example.com or 856.667.5805.