Opinion analysis: Justices confirm continuing duty for ERISA trustees to monitor investments
Justice Breyer’s opinion for the Court yesterday in Tibble v. Edison International underscored the Court’s commitment to unstinting enforcement of the fiduciary duties that govern ERISA plans. Although the case involves considerable procedural detail, the issue before the Court is a simple one: is it enough for the ERISA duty of prudence that the fiduciary make prudent decisions to invest in the first instance, or must the fiduciary also make prudent decisions about whether it should sell assets (or otherwise change the composition of the plan’s portfolio)?
If that sounds a bit technical, the underlying facts demonstrate the problem well. A firm’s 401(k) plan invested in a series of mutual funds in 1999 and another series in 2002. A group of employees filed suit in 2007, claiming that the fiduciaries (including, among others, the employer-respondent Edison International) should have invested in “wholesale” funds, which have lower management fees than the “retail” funds in which the plan was invested. Because the plan’s 1999 investment was made more than six years before the complaint, the fiduciaries claimed the suit was untimely as to those funds. The employees responded that the fiduciaries had a continuing duty to monitor investments, which continued into the limitations period. When the Ninth Circuit affirmed the district court’s ruling for the employer, the Court granted review.
The result has not really been in doubt since Edison filed its brief earlier this spring agreeing that the duty of prudence requires periodic monitoring. By the time of the argument, the dispute had become almost semantic: Edison insisted that it need reevaluate investments only if there is a significant change; the employees insisted on a more general duty of ongoing prudent supervision. Without resolving that particular debate, the Court’s opinion vigorously restates the requirement of prudence that governs ERISA plans.
Like the opinion Justice Breyer wrote for the Court last year in Fifth Third Bancorp v. Dudenhoeffer, the opinion suggests that the basic concept of prudence compels the result so clearly that the Court can’t even find contrary arguments to consider. The result is an opinion that strings together broad statements about the ERISA duties. Moreover, in contrast to Fifth Third, in which the Court balanced its ERISA message with a cautionary discussion of the perils of stock-drop class actions, yesterday’s opinion contains nothing to water it down. A few quotes convey the tone:
- “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.”
We can expect those quotes to dominate ERISA analysis in the courts of appeals for years to come.
The Court’s perception that this case is easy underscores a sizable gap between the Court’s matter-of-fact acceptance of broad enforcement of ERISA duties and the wide perception in the court of appeals that litigation by employees challenging employer investment decisions is not in substance different from the securities class actions to which the Court has been so hostile. The same perception was evident in the dismissal last year (in Fifth Third) of a presumption of prudence for ESOPs adopted by every court of appeals to consider it. It will be interesting to watch in the coming years as the courts of appeals integrate the implications of decisions like these into their general treatment of ERISA claims.
PLAIN LANGUAGE: 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 holds that the trustees do have that continuing duty to monitor.