Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, February 24, 2015

Court leans towards period of repose in mutual fund 401(k) selections

By Jim Hamilton, J.D., LL.M.

Supreme Court Justices expressed skepticism that an investment adviser has a continuing duty to monitor the selection of mutual funds for 401(k) plan and there should be no period of repose. The Court is reviewing a Ninth Circuit ruling that, although fiduciaries breached their duty of prudence by offering higher-cost mutual funds to plan participants when identical lower-cost mutual funds were available, the claim was barred by because the fiduciaries initially chose the higher cost mutual funds as plan investments more than six years before the claim was filed (Tibble v. Edison InternationalNo. 13-550).  

Statute of limitations. The Department of Labor filed an amicus brief and the Court has granted the DOL the right to participate in the oral argument. The U.S. Solicitor General urged the Supreme Court to rule that a claim that 401(k) plan fiduciaries breached their duty of prudence by offering higher cost mutual funds to plan participants when identical lower-cost mutual funds were available was not barred by the six-year statute of limitations. The Government contended that, while the fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed, ERISA fiduciaries have an ongoing duty to review plan investments and divest investments that are imprudent.

Justice Sonia Sotomayor was concerned about what kind of monitoring would be done under the continuous monitoring theory. You cannot do a complete due diligence every time you buy something, she reasoned, otherwise the funds would grind to a halt. Also, you cannot have every three months some sort of general market review of whether something should be selected or not.

Justice Antonin Scalia said that you cannot ask every federal district court  to not only determine whether a particular purchase was sensible or not, but to say year-by-year whether a careful enough review was done. He does not think the courts are capable of doing that.

Amicus brief. The securities industry filed an amicus brief with the Court in an effort to debunk the contention that it is necessarily imprudent for a 401 (k) plan fiduciary to decide to offer retail share classes of mutual funds to plan participants, and that fiduciaries necessarily must reexamine that decision each and every time they give any thought to any of the plan’s investments, even when nothing has changed.

SIFMA argued that there are good reasons why prudent fiduciaries (including fiduciaries for numerous 401(k) plans sponsored by SIFMA members) choose to offer to plan participants retail share classes of mutual funds, rather than institutional share classes or other types of investment vehicles. And there are good reasons why such a decision ought to be entitled to repose. If there is no repose for investment decisions made years earlier, said SIFMA, the ongoing risk of such litigation may require fiduciaries to spend unnecessary time and money repeatedly reevaluating past decisions. In some cases, the unnecessary cost and burden could even discourage the formation of 401(k) plans in the first place.

The case is No. 13-550.

MainStory: TopStory ExchangesMarketRegulation

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.