The Trouble with Tibble: The Uncertain Scope of Trustees' Ongoing Duty to Monitor Investments
The U.S. Supreme Court recently re-confirmed that ERISA trustees have an ongoing duty to monitor trust investment options in Tibble v. Edison International, 575 U.S. ___, 135 S. Ct. 1823, 191 L. Ed. 2d 795 (May 18, 2015) (6-year statute of limitation did not preclude breach of ERISA defined contribution plan trustees’ ongoing fiduciary duty to monitor and remove imprudent investment choices made available to beneficiaries occurring within six years of filing suit):
Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset. … Rather, the trustee must systematically consider all the investments of the trust at regular intervals to insure that they are appropriate.
Tibble, supra, 135 S. Ct. at p. 1828 (internal quote marks omitted, citing A. Hess, G. Bogert, & G. Bogert, Law of Trusts and Trustees, §684, pp. 145-148 (3d ed. 2009).), and concluding:
In short, under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.
Id. at pp. 1828-1829 (emphasis added).
With regard to whether or not this duty was active or passive, Tibble did not hold that the mere absence of a triggering event would absolve the trustees of their duty to take some affirmative steps to fulfill their ongoing duty to monitor, although the decision did indicate that the presence or absence of a trigger could have some bearing on the scope of the required review:
The Ninth Circuit did not recognize that under trust law a fiduciary is required to conduct a regular review of its investment with the nature and timing of the review contingent on the circumstances.
Id. 135 S. Ct. at p. 1827-1828. Although confirming that trustees have an ongoing affirmative fiduciary duty to monitor trust investments, the Tibble court ultimately refused to provide any further specific details of the continuing duty to monitor of some kind that was required. Instead it simply remanded the case back to the Ninth Circuit to consider the respondents’ specific claims noting, We express no view on the scope of respondents’ fiduciary duty in this case. Id. at p. 7.
However, some further guidance can be derived from other sources.
Tibble did not make wholly new law. Under longstanding common law trust principles, trustees who invest trust funds have an ongoing duty to monitor those investments in order to comply with their fiduciary duties to exercise prudence and care. See Whitfield v Cohen, 682 F. Supp. 188, 196-197 (S.D.N.Y. 1988):
…Cohen’s common law and ERISA responsibilities did not end with the initial decision to invest Plan assets with Penvest… Cohen had a duty to monitor Penvest’s performance with reasonable diligence and to withdraw the investment if it became clear or should have become clear that the investment was no longer proper for the plan.
Similarly, in Public Service Company of Colorado v. Chase Manhattan Bank, 577 F. Supp. 92 (S.D.N.Y. 1983) the bank trustee of a pension trust was held liable for breach of fiduciary duty for its failure to adequately monitor and timely dispose of a large real estate investment loan that drastically declined in value after years of neglect by the owner that the bank negligently failed to discover, in part because it failed to obtain and review annual reports on the condition of the property that its own policies required. By the time that the bank belatedly discovered the deterioration of the development, it was too late to prevent the large loss to the trust.
The same failure of a trustee to follow its own policies to review and diversify trust assets resulted in removal and surcharge liability for the bank trustee in In re Estate of Rowe, 712 N.Y.S.2d 662 (3d Dept. 2001). The bank was trustee of a charitable lead trust funded entirely with shares of IBM stock, but had failed to take any steps to diversify the trust’s investments despite its internal policies that required such diversification. The stock declined for five years until the suit successfully charging the bank with breach of trust for its failure to review and dispose of the inappropriately over-concentrated portfolio was filed.
Federal regulations governing ERISA trustees, although not binding on governmental plan trustees, may be considered as instructive because they apply the same generally applicable prudent investor principles to confirm an ongoing duty to monitor investments that continues beyond the due diligence supporting the initial decision to make the investment performed at the outset. See 29 Code of Federal Regulations (CFR) § 2509.75-8 Questions and answers relating to fiduciary responsibility under the Employee Retirement Income Security Act of 1974, FR-17:
Q: What are the ongoing responsibilities of a fiduciary who has appointed trustees or other fiduciaries with respect to these appointments?
A: At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure.
Tibble, supra, 135 S. Ct. at p. 1828 also relied upon the general principles included in the duties of a prudent investor under § 90 of the Restatement (Third) of Trusts comment b, p. 295 (2007):
The trustee’s duties apply not only in making investments, but also in monitoring and reviewing investments, which is to be done in a manner that is reasonable and appropriate to the particular investments, courses of action, and strategies involved.
The same authority in the Introductory Note (Principles of Prudence, item 3) to the Restatement (Third) of Trusts Chap. 17 (the Prudent Investor Rule) §§ 90-92, at p. 291 (2007) emphasizes that the general standard of prudent investment extends to the monitoring of costs, as well as investment gains and losses:
The duty to be cost conscious requires attention to such matters as the cumulation of fiduciary commissions with agent fees or the purchase and management charges associated with mutual funds and other pooled-investment vehicles.
Accordingly, principles of prudence include an ongoing fiduciary responsibility on trustees to monitor pension trust investments as a facet of the generally applicable duty to invest prudently. The specific details of how to fulfill that fiduciary responsibility are within the discretion of the trustees. However, we offer the following two general observations.
First, after Tibble it is now established that the duty to monitor is active and ongoing, and hence some process should be adopted and implemented that will ensure reasonable oversight on a periodic basis of the investments made on behalf of the trust that continues beyond the due diligence undertaken when the investment decision was originally made. Ordinarily, such a process will include some method to monitor compliance with the system’s existing investment policies and the contractual terms (including diversification and leverage limits, as well as fees and expense allocation provisions) applicable to the particular investments. A process to trigger a more focused review in some circumstances is appropriate, but a process that forgoes any ongoing review whatsoever unless the trigger is met may not be sufficient.
Second, any such process must be reasonable, considering the resources available to support it. Although all systems require periodic reports from their investment managers and typically from their investment consultant as well, pension systems vary widely in the degree of staff administrative and budgetary support available to support trustee and staff review of those reports. Exclusive reliance upon self-reporting by investment managers themselves also suffers from the inherent weakness of the self-interest of the managers in concealing their own inadequacies. Unfortunately, those conflicts could only be expected to strengthen, not weaken, with the seriousness of a manager’s non-compliance and so such a method would tend to lose reliability at the very time that it was most necessary. Accordingly, trustees may wish to explore the feasibility of a more disinterested approach, either internally, if that is administratively feasible, or through an outside vendor, if such can be done at a reasonable cost. Certainly the investment consultant that performed the initial due diligence to support the original investment may fairly be expected to have continued to monitor the performance of the investment that they had a hand in recommending and as to which the consultant presumably provides regular reports to the retirement system. An inquiry with regard to the consultant’s ongoing attitude towards the manager or entity should not be met with hostility from the consultant. Some existing custodian and investment consultants are willing to provide some form of investment compliance monitoring for an additional fee. In addition, some vendors offering forensic fee and expense auditing services have begun to emerge as trustees have begun to focus on such cost and expense allocation issues. Although not mandating any particular methodology, Tibble is a timely reminder that ignoring consideration of these ongoing obligations is no longer an option.