The U.S. Supreme Court ruled that employers have an obligation to properly monitor 401(k) investments to determine if lower-cost investment offerings are available. In addition, lower court rulings were overturned that tied the start of the six-year statute of limitations for employees to file a lawsuit against an employer for alleged breach of this fiduciary duty to the date investments were added.

The ruling came in a closely watched case: Tibble v. Edison International. The case involves three mutual funds added to Edison’s 401(k) plan in 1999 and three mutual funds added to the plan in 2002. Edison added the higher-cost retail class of shares even though cheaper institutional share classes were available. The plaintiffs argued that by selecting the more expensive share class, Edison breached its fiduciary duty.

In writing the unanimous opinion, Justice Stephen Breyer relied on trust law. Trust law follows what is known as the prudent man rule. This rule requires fiduciaries to discharge their responsibilities “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use. Breyer specifically opined, “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 Bogert treatise states that ‘[t]he trustee cannot assume that if investments are legal and proper for retention at the beginning of the trust, or when purchased, they will remain so indefinitely.’”

The justice added, “In short, under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. A plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.”

Also notable is the overturning of a lower court rulings regarding the statute of limitations. The Supreme Court said the plaintiffs did not violate the six-year statute of limitations because their lawsuit was filed within six years of the alleged breach of fiduciary duty occurring. Lower courts had previously ruled against part of the plaintiffs’ claims, opining that the lawsuit was filed more than six years after the first three funds in question were added in 1999.

“Tibble et al. v. Edison International et al.,” Supreme Court of the United States, May 18, 2015.

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