PLANADVISER - July/August 2018 - 55

fiduciary fitness
Statute of Limitations
Is there a continuing duty to monitor prohibited transactions?
IN the tax-qualified plan area, even if an
operational defect occurs in a closed plan
year-generally within three years after
the Form 5500 for the plan year is filed-so
that the IRS could not disqualify the plan for
that year, the agency's position is that the
violation taints the plan until it is corrected.
This is why plans that apply for relief under
the IRS Employee Plans Compliance Resolution
System (EPCRS) generally should
correct for all plan years.
Under the Employee Retirement Income
The open
question for the
District Court
was whether an
ERISA fiduciary
had a similar
Security Act (ERISA), because a plan fiduciary
has a duty both to prudently select
and prudently monitor investments, it
is frequently the case that a defendant's
statute of limitations defense may successfully
bar a plaintiff's claim that an investment
was imprudently selected-but will
not withstand one that the investment was
improperly monitored.
Courts have, however, reached different conclusions
continuing duty
not to engage
in prohibited
transactions.
with respect to whether there is a continuing duty to
monitor alleged prohibited transactions.
In Re Northrop Grumman ERISA Litigation, a 2015 California
District Court case, the question was whether allowing a
contract for administrative services that was first made
outside of the limitations period to remain in effect during
the limitations period constituted both a breach of fiduciary
duty and a prohibited transaction, such that plaintiffs'
claims were timely.
After the Supreme Court decision in Tibble v. Edison, it
was clear that a fiduciary had a duty periodically to review
the prudence of existing investments and to remove imprudent
ones.
The open question for the District Court was whether an
ERISA fiduciary had a similar continuing duty not to engage
in prohibited transactions. The District Court concluded
that there was such a duty.
The starting point for its analysis was that the duty
not to engage in prohibited transactions derives from the
general duty of loyalty recognized by the common law
of trusts. Under trust law, the duty of loyalty continues
throughout the administration of the trust. Thus, if a
trustee learns of a third party's conflicting interest, his duty
is therefore to remove it.
Consequently, the District Court concluded that, " given
the fiduciaries' continuing duty to avoid transactions
violating the duty of loyalty, plaintiffs can
argue that each payment pursuant to an
annual approved schedule during the limitations
period constitutes a breach of fiduciary
duty and a prohibited transaction. "
However, the Northrop Grumman
analysis is a minority view. For example,
in Cassell et al v. Vanderbilt University, a case
decided by the Middle District in Tennessee
in January, plaintiffs alleged that
the
defendants had engaged in a prohibited
transaction by locking the plan into the
CREF Stock Account and the recordkeeping
services of TIAA, which they contended
was an unreasonable arrangement.
To the extent that the alleged prohibited
transaction indeed locked the plan
into an unreasonable arrangement, the
action was time-barred, but plaintiffs also
alleged claims based upon defendants'
continuing transactions with TIAA-CREF.
However, the court agreed with defendants that the
continuing violation theory does not apply to prohibited
transaction claims, which are based on discrete transactions-obviously,
if the prohibited transaction is a lease or a
loan, or a guarantee of a loan, as in the U.S. Tax Court case
of Peek v. Commissioner, there can be a continuing prohibited
transaction.
The District Court agreed with those courts that hold
that a decision to continue a certain investment or a defendant's
failure to act cannot constitute a " transaction " for
purposes of ERISA's prohibited transaction statutes. In
White v. Chevron, the court explained that, " unlike a claim for
breach of fiduciary duty, which turns on the prudence of the
decisionmaking process, a violation of Section 1106 occurs
when a fiduciary takes a particular action with respect to a
plan. It makes no sense to assert a claim of duty to monitor
a past occurrence, and the 9th Circuit has opined (Wright
v. Oregon Metallurgical Corp.) that there is no such thing as a
" continuing " prohibited transaction, as the plain meaning of
transaction is that it is a point-in-time event. "
Marcia Wagner is an expert in a variety of employee benefits and
executive compensation areas, including qualified and nonqualified
retirement plans and welfare benefit arrangements. She is a summa
cum laude graduate of Cornell University and Harvard Law School and
has practiced law for 31 years. Wagner is a frequent lecturer and has
authored numerous books and articles.
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