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Benefits

Statute of Limitations Bars Claim That High Fees Made Plan’s Investments Imprudent

EBIA  

EBIA  

Bernaola v. Checksmart Financial LLC, 2018 WL 3389900 (S.D. Ohio 2018)

A federal district court has determined that excessive fee claims brought against a 401(k) plan’s fiduciaries were untimely because they were filed more than three years after the claimant, an employee participating in the plan, acquired actual knowledge of the fees charged by the plan’s investments. The employee claimed that the plan’s fiduciaries breached their fiduciary duties under ERISA by authorizing and retaining the plan’s actively managed “lifestyle portfolio” investments, which charged higher fees, but had lower returns, than index funds. The plan’s fiduciaries argued that the employee had actual knowledge of the portfolios’ fees in 2012, so the claims—which were filed in 2016—were time-barred because they were not commenced within “three years after the earliest date on which the [employee] had actual knowledge of the breach,” as required by ERISA.

The court concluded that there was “no genuine dispute” that the employee knew (or should have known) the expense ratios for the plan’s investment options, as those had been sufficiently disclosed. The court then addressed the employee’s three main objections to application of ERISA’s three-year statute of limitations. First, the court refused to recognize the employee’s argument that his claim was based on the fiduciaries’ investment-selection process and should not be time-barred because he lacked actual knowledge of that process, since allowing such claims would “essentially erase the statute of limitations” for breach of fiduciary cases given employees’ typical ignorance about plan decisionmaking. Second, the court rejected the employee’s argument that he could not have had actual knowledge of the breach before the funds’ poor performance was known. The claim fails because neither side could be expected to predict future performance, and within the plan’s list of 50 investment funds the employee had access to sufficient information about other funds’ fees to make comparisons. Finally, the court distinguished the continuing violation theory applied in the Tibble case (see our Checkpoint article), observing that Tibble involved an application of ERISA’s six-year limitation period, which does not apply to cases of actual knowledge. Moreover, even if the employee had a continuing-breach-of-duty claim, the time for bringing that claim would have started with the employee’s actual knowledge of the first violation.

EBIA Comment: This case highlights the importance of “actual knowledge” under ERISA’s statute of limitations for fiduciary violations: Not only does actual knowledge shorten the limitation period from six to three years, but it may also effectively prevent the use of a continuing violation theory of liability. The case also illustrates how it is not always clear what an employee must know to have actual knowledge. Here the employee’s actual knowledge derived primarily from the plan’s routine disclosures (enrollment kit, summary annual report, and quarterly benefit statements referring to a website with detailed fee information). More complex or nuanced claims might not be so easily dismissed. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.G.1 (“Prudence in Selecting and Monitoring Investments”) and XXXVII.H.3 (“Time Limits for Filing Fiduciary Breach Claims”).

Contributing Editors: EBIA Staff.

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