Supreme Court Rules That Availability of Prudent Investment Options Does Not Excuse Fiduciaries’ Failure to Remove Imprudent Ones

The U.S. Supreme Court has overturned an appellate court’s dismissal of participants’ claims that retirement plan fiduciaries breached ERISA’s duty of prudence by (1) retaining recordkeepers that charged excessive fees; (2) offering investments in “retail” share classes that carried higher fees than those charged by otherwise identical “institutional” classes; and (3) including so many investment alternatives that participants were likely to be confused and make poor investment decisions. The Court characterized these claims as assertions that the fiduciaries failed to remove imprudent investments from the plans’ offerings.

In reversing the appellate court, the Court applied its 2015 decision in Tibble (see our Checkpoint article), which held that the continuing duty to prudently monitor investments is separate from the duty to prudently select them, and emphasized that fiduciaries must conduct an independent evaluation to determine which investments may be prudently included in the plan’s menu of investment options. Fiduciaries breach their duty to monitor by failing to remove an imprudent investment from the plan within a reasonable time. According to the Court, the appellate court erred in relying on the participants’ ultimate choice over their investments to excuse the fiduciaries’ allegedly imprudent decisions. The Court rejected the appellate court’s reasoning that, because the participants’ preferred investments were available, they could not complain about the flaws in other options. Consequently, the Court vacated the appellate court’s decision and sent the case back to that court with instructions to reevaluate whether the participants plausibly alleged a violation of the duty of prudence as articulated in Tibble.

EBIA Comment: The Court’s unanimous ruling endorsing the Tibble analysis underscores that fiduciaries must not only select investments prudently, but also systematically and regularly monitor them and remove imprudent ones. Moreover, the availability of prudent investment options in a participant-directed retirement plan does not preclude potential fiduciary liability for including imprudent options. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.G (“Fiduciary Duty #2: Procedural Prudence”), XXV.F (“Investment Fees and Expenses”) and XXVI (“ERISA Fiduciary Rules: Participant-Directed Investments”). See also EBIA’s ERISA Compliance manual at Section XXVIII.I.8 (“Litigating a Breach of Fiduciary Duty Claim”).

Contributing Editors: EBIA Staff.