By Pension and Benefits Editorial Staff
Breach of fiduciary duty claims challenging a plan’s investment options as being imprudent, undiversified, and unreasonably expensive were time-barred because the plan participants had actual knowledge of all the facts underlying the ERISA claims more than three years before filing suit, according to a federal trial court in Ohio. The fiduciaries fully disclosed the expense ratios and performance data for each plan investment option, providing the evidentiary foundation for the fiduciary breach claims more than three years before the participants commenced their action.
High fees associated with underperforming actively managed funds. Checksmart Financial maintained a 401(k) plan that allowed participants to direct their retirement funds into a variety of investment vehicles. Plan participants could elect to manage their own investments or choose a “Lifestyle Portfolio,” under which investments would be managed for them. Over 70 percent of the assets of individuals participating in the plan were invested in Lifestyle Portfolios.
Plan participants invested in Lifestyle Portfolios claimed that they did not know the costs and performance of their investment, as compared to other available alternatives for similarly-sized defined contribution plans. In addition, the participants charged that the expenses associated with the plan investments were grossly excessive because the investment options were not diversified, but were focused on expensive and unsuitable actively managed funds and did not include an adequate or appropriate number of passively managed and less expensive mutual fund investment options. Noting that index funds (S&P 500 Index Fund) outperformed the plan’s actively managed funds, the participants asserted that the plan fiduciaries breached their duties of loyalty and prudence under ERISA by failing to ensure that the plan paid reasonable and appropriate fees and by retaining the under-performing and expensive actively managed funds. Reasonable diligence, the participants charged, would have enabled the fiduciaries to discover that the plan was imprudently investing in underperforming funds.
Three-year statute of limitations. The plan fiduciaries maintained that the participants’ claims were foreclosed by ERISA’s three- year statute of limitations. The fiduciaries relied on ERISA Sec. 403(2), which states that an action for breach of fiduciary duty may not be brought three years after the earliest date on which a plaintiff has “actual knowledge” of the breach. The court agreed and granted the fiduciaries’ motions for dismissal and summary judgment.
Actual knowledge of underlying facts. In addressing whether the plan participants had actual knowledge of the breaches being alleged, the court explained that “actual knowledge” refers to knowledge of the underlying conduct giving rise to the alleged violations, rather than to knowledge that the underlying conduct violated ERISA. Thus, the determinative issue before the court was whether the plan fiduciaries had disclosed the expense ratios (i.e., fees) for the various investment options offered by the plan three years before the participants filed suit in 2015.
The court found that the fiduciaries had disclosed the expense ratios in 2012 through three distinct avenues.
First, the fiduciaries disclosed the expense ratios and performance data for each fund in a “Returns and Fees” document included in an enrollment kit that participants received before they enrolled in the plan and selected investments. The participants, further, signed the enrollment form, confirming acknowledgment of the fees and risks related to the various investment options.
Next, the court found that detailed information regarding the plan’s fees and expenses was mailed to the plan participants in 2012. Specifically, the fiduciaries mailed out Summary Annual Report (SAR) Notices disclosing the annual operating expenses for each of the funds offered under the plan.
Finally, the court noted that the participants received detailed quarterly benefit statements that disclosed: a participant’s account value, personal rate of return, beginning and ending balances, projections for future income and investments, other investment options, a summary of charges and fees, and a warning that past performance was not a guarantee of future results. The quarterly statements also referred the participants to a mutual fund provider’s website, which contained detailed fee information, past performance data, annual operating expenses, and expense ratios for each investment option.
The cumulative evidence indicated to the court that there was no genuine dispute that the participants knew or should have known the expense ratio of the investment options offered under the plan. Thus, the participants had actual knowledge of the underlying facts giving rise to the alleged ERISA violations. The fact that the participants may not have read the information, the court explained, was not relevant to their actual knowledge. The determinative factor triggering the statute of limitations was the disclosure to the participants of the information underlying the complaint.
Continuing duty to monitor does not preclude application of three-year limitations period. The participants alternatively maintained that ERISA imposes an ongoing fiduciary duty to monitor plan investments, which effectively rendered the failure of the fiduciaries to remove the imprudent investment options actionable year after year. The participants relied on Tibble v. Edison Int’l (U.S. Sup. Ct (2015), 135 S. Ct 1823), in which the Supreme Court held that participants may allege a breach of fiduciary duty based on the failure to properly monitor and remove imprudent investments, as long as the alleged breach of the continuing duty occurred within 6 years of the suit being filed. The trial court, however, noted that Tibble involved application of the six-year statute of limitations under ERISA Sec. 413(1). Absent actual knowledge of a breach, the court agreed, the six-year statute of limitations applies. By contrast, however, the three-year limitations period under ERISA Sec. 413(2) governs when, as in the instant case, a plaintiff has actual knowledge of a breach, even if the breach is of a continuing nature. To apply the continuous violation theory to ERISA Sec. 413(2), the court reasoned, would supplant the plain language of the statute.
Source: Bernaola v. Checksmart Financial LLC (DC Ohio).
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