With ERISA entering its 41st year, commentators highlighting
the landmark legislation's successes and failures have paid little attention to
the newfound focus on fiduciary responsibility resulting from an increase in
litigation from alleged fiduciary breaches, particularly in 401(k) defined
Much of the litigation has resulted in awards and
settlements favorable to plan participants, but what remains are important
challenges to the fiduciary standard of care of the Employee Retirement Income
Security Act. Some are now likely to come before the U.S. Supreme Court, which
already has ruled favorably this year in support of this standard.
In Fifth Third Bancorp vs. Dudenhoeffer, the
Supreme Court last June struck down a presumption of prudence, known as the
Moench presumption, which had for some years protected plan fiduciaries in
employee stock ownership plan “stock drop” cases against claims for imprudently
retaining employer stock as a plan investment unless the employer could be
shown to be in a dire situation.
In the Fifth Third case, the court found the law did not
create any special presumption favoring fiduciaries of employee stock ownership
plans. Rather, the same standard of prudence applies to all ERISA fiduciaries,
including ESOP fiduciaries, which is the prudent expert standard of care.
Obstacles highlighted by the court still remain to
succeeding in claims for fiduciary breach in ESOP stock-drop cases, because
claims in such cases often involve the use of non-public information and
complex securities law issues.
In the next 401(k) case coming before the Supreme Court,
Tibble et al. vs. Edison International et al., the court will consider whether
denial based on the statute of limitations of a fiduciary breach claim
involving imprudent initial fund selection will proscribe a claim for failure
to prudently monitor and replace those funds on a continuing basis.
Both the district and appeals courts found that to allow
such a claim would defeat the purpose of the statute of limitation. But that
reasoning ignored ERISA's separate duty to periodically monitor and evaluate
plan investments once selected.
The appeal on this issue is supported by Donald B. Verrilli,
U.S. solicitor general, who, in an amicus brief requested by the Supreme Court,
pointed out that to prevent a claim based on a continuing fiduciary duty to
monitor investments effectively exempts plan fiduciaries from important ongoing
fiduciary duties concerning investment options first offered more than six
years earlier and fails to protect participants retirement savings.
The Supreme Court has been petitioned to review the
fiduciary standard of care in the Tussey case. In this 401(k) case, ABB plan
fiduciaries were subject to allegations over several issues: failing to monitor
record-keeping costs and negotiate rebates available to the plan; selecting
more expensive share classes when less expensive share classes were available;
failing to abide by selection and monitoring criteria contained in the plan's
investment policy statement when changing fund options in the plan's investment
menu; and agreeing to pay Fidelity Management Trust Co., the plan's record
keeper and trustee, higher than market costs for record keeping in order
allegedly to subsidize corporate services provided by Fidelity to ABB.
The U.S. Court of Appeals for the 8th Circuit upheld a lower
court's decision that ABB had violated its fiduciary duties by failing to monitor
and control record-keeping fees and by allowing the plan to subsidize corporate
services, but it found that the lower court had failed to apply an abuse of
discretion standard to how ABB applied its selection and monitoring criteria
when switching investment funds and accordingly remanded the case for further
So once again, in face of a clear ERISA mandate requiring
plan fiduciaries to act as would a prudent expert, we see continued application
of a legal fiction that gives deference to plan fiduciaries' imprudent
decisions. While some will argue that the Moench presumption differs from an
abuse of discretion or fiduciary deference theory, the underlying flaw is the
same. By giving any deference to plan fiduciaries in fiduciary breach cases,
the courts are undermining ERISA's clear direction that plan fiduciaries must
act as would a prudent expert, the hallmark of a fiduciary standard of care.
The Supreme Court has an important opportunity to unfetter
ERISA's fiduciary standard of care from contrived impediments. So doing would
strengthen employee retirement income security. This already faces plenty of
challenges. Diminishing ERISA's prudence standard should not be one of them.
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