Supreme Court Makes It Potentially Easier for Plaintiffs to Challenge Investment Decisions in Retirement Plans

In Tibble v. Edison International, No. 13-550 (U.S., May 18, 2015), the Supreme Court ruled that plaintiffs can timely commence a claim for breach of fiduciary duty within six years of the breach of a continuing duty of prudence in selecting investments. In 2007, several Edison 401(k) beneficiaries sued regarding funds added in 1999 and 2002, arguing that identical but lower-cost funds should have been used. The district court and the Ninth Circuit ruled that the plaintiffs could not sue regarding funds added in 1999 because the six-year statute of limitations had passed. The Supreme Court reversed, holding that trustees have a continuing duty to monitor trust investments and remove imprudent ones, and thus a claim would be timely so long as the alleged breach of this continuing duty occurred within six years of the lawsuit.

Observers of the decision disagree about how much this really changes fiduciary duties because the requirement to monitor has always been present. A failure to change investments in light of material changes has always trumped the six-year statute of limitations. The Court's decision, however, suggests that more detailed periodic investment decisions than currently are the norm would be required. The Court did not opine on whether the fiduciaries had acted improperly or offer guidance as the standards that fiduciaries should use in monitoring plan investments. Both issues may be made on remand.

The implications for private company ESOPs are unclear. Public companies who have more choices about removing employer stock would seem to be under more pressure to review the appropriateness of that investment, although just how this would change what they already do will need to be worked out in future cases. Fiduciaries of ESOPs in closely held companies rarely have practical options to sell the shares without imposing losses on participants, so it seems likely that this case will have little, if any, impact on ESOPs in these companies.