En banc 9th Circuit restores ‘power’ to Edison employees’ suit against 401(k) plan fiduciaries

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By Joy Waltemath

By Anne Sherry, J.D.

The Ninth Circuit revived a lawsuit against the administrators of Edison International’s 401(k) plan. After the Supreme Court observed that retirement plan administrators may have a continuing duty to monitor plan investments, a Ninth Circuit panel held that the beneficiaries forfeited any duty-to-monitor argument. Rehearing the case, however, the full court decided that it was Edison that forfeited the forfeiture argument (Tibble v. Edison International, December 16, 2016, Smith, M.).

Procedural twists and turns. The 401(k) beneficiaries’ lawsuit questioned how the fiduciaries could have acted prudently in offering retail-class funds over materially identical institutional-class funds. The Ninth Circuit’s first decision affirmed the district court’s dismissal, holding that the claims as to mutual funds added in 1999 were untimely because the beneficiaries had not pointed to a change in circumstances within the limitations period that might trigger an obligation to review and change investments.

The Supreme Court reversed and remanded, holding that the statute of limitations does not create an absolute bar based solely on the time of the initial fund selection. Trust law imposes a continuing duty to monitor investments, the Court wrote, and as long as the alleged breach of that duty occurred within the limitations period, the suit may be timely. On remand, however, the Ninth Circuit held that the duty-to-monitor argument had been forfeited because the investors based their claim not on an alleged failure to monitor, but on a failure to conduct due diligence based on significant changes in the funds. In fact, the argument was “doubly forfeited” because it hadn’t been raised before the district court either.

Rehearing. The latest decision, from the en banc court, vacates the district court’s decisions and remands on an open record for trial on the claim that the fiduciaries breached their continuing duty to monitor the appropriateness of the investments.

The beneficiaries did not waive their duty-to-monitor argument. Beginning with the appeal, the en banc court quoted the plaintiffs’ argument that “in light of the continuing duty of prudence imposed on plan fiduciaries by ERISA, each failure to exercise prudence constitutes a new breach of duty.” This squarely embraced the theory accepted by the Supreme Court. It was Edison that argued in response for a duty that was limited to changed circumstances. Edison also argued in post-trial briefing that “by challenging the prudence of maintaining retail share classes,” the beneficiaries were improperly attempting to resurrect properly barred claims. Because the parties reasonably believed that the district court’s summary judgment order precluded the duty-to-monitor claim, and the beneficiaries preserved the claim on appeal, it was not forfeited. Instead, Edison itself forfeited the forfeiture argument by failing to raise it in the initial appeal.

ERISA and analogous trust law. In remanding the case, the Supreme Court tasked the Ninth Circuit with resolving the scope of the plan fiduciaries’ duty to monitor investments while recognizing the importance of analogous trust law. The plan fiduciaries’ duty arises from ERISA, the court observed, and ERISA duties in turn derive from the common law of trusts. Under those principles, “a trustee cannot ignore the power the trust wields to obtain favorable investment products,” especially when the products are substantially identical to, but cheaper than, products the trustee has already selected.

The beneficiaries also requested a new trial on the issue of whether Edison breached its fiduciary duties. The court agreed that the record does not establish exactly what would have resulted from the application of the correct legal standard. Accordingly, it remanded on an open record for the district court to consider these issues in light of the Supreme Court and en banc opinions.

Source:: Employment Law Daily Newsfeed


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