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United States Supreme Court Rules that Fiduciary’s Continuing Duty to Monitor Investments Made 8-Year ERISA Claim Timely.

On May 18, 2015, The Supreme Court of the United States (“Supreme Court”) reversed the 9th Circuit Court of Appeals’ (“9th Circuit”) ruling in Tibble et al. v. Edison International et al., wherein the 9th Circuit affirmed the District Court’s decision to declare a portion of the Petitioners’ claims as untimely.  The question certified to the Supreme Court on writ of certiorari was: “whether a fiduciary’s allegedly imprudent retention of an investment in an “action” or “omission” that triggers the running of the 6-year limitations period.”

In Tibble, the Petitioners were several individual beneficiaries acting on behalf of the participants in the Edison 401(k) Savings Plan (“Plan”), who sought to recover damages for alleged losses suffered by the plan arising from Respondents’ alleged a breach of its fiduciary duty under the Employee Retirement Income Security Act of 1974 (“ERISA”).  88 Stat. 829 et seq.  The Plan is a defined contribution plan, meaning that the participants’ retirement benefits are limited to the value of their individual accounts. The value of such account is determined by the market performance of the account, less expenses, such as management fees.  Petitioners argued that Respondents breached their fiduciary duty by offering six higher priced retail-class mutual funds as Plan investments when materially identical, lower priced institutional-class mutual funds were available.  Three of the six mutual funds in question were added to the Plan in 1999 and the remaining three were added in 2002.

The District Court concluded that Respondents failed to exercise “the care, skill, prudence and diligence” that ERISA requires with respect to including the 2002 mutual funds in the plan.  See 29 U.S.C § 1104(a)(1) However, the District Court found that Petitioners’ claims regarding the 1999 mutual funds were untimely under 29 U.S.C § 1113, which states, in relevant part that “[n]o action may be commenced with respect to a fiduciary’s breach of any responsibility, duty, or obligation” after the earlier of six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation.”

The 9th Circuit rejected Petitioners’ argument that the action was timely on the basis it was filed in 2007, more than 6 years from the 1999 purchase date.  In doing so, the Supreme Court found that the 9th Circuit erred by applying a statutory bar to claim of a breach of fiduciary duty without considering the nature of the fiduciary duty in question.  Specifically, the 9th Circuit should have realized that 29 U.S.C § 1104(a)(1) “created a continuing duty of some kind to monitor investments and remove imprudent ones.” Furthermore, “[a] plaintiff may allege that a fiduciary breach the duty of prudence by failing to properly monitor investments and remove imprudent ones.”  As such, the statutory period did not begin when the mutual fund retail share classes were purchased in 1999, but rather it continually accrued as the Respondents’ failed to prudently purchase securities for the Plan by allowing the more expensive retail share classes to remain in the Plan.

Before your broker or investment advisor makes a mutual fund recommendation to you, they first must determine whether that investment is suitable for you.  Mutual funds offer different share classes that may or may not be suitable for an individual, depending on the investment objectives, liquidity needs, and risk tolerance.  The securities fraud attorneys at Lax & Neville represent investors whose investment advisor recommended mutual fund shares that would benefit the investment advisor by providing them with higher fees or engage in mutual fund switching to earn excessive commissions.  If you believe that your investment advisory may have breached its fiduciary duties, contact Lax & Neville LLP today at (212) 969-1999 and schedule a consultation.