Supreme Court to Review What It Takes for a Plan Participant to Have Actual Knowledge of a 401(K) Plan’s Investments

Daniel L. Morgan

The Issue before the Supreme Court

On June 10, 2019, the Supreme Court granted certiorari in a case from the 9th Circuit Court of Appeals involving the statute of limitations applicable to claims under the Employee Retirement Income Security Act (“ERISA”). The outcome of this case has potentially important implications for employers maintaining 401(k) and other retirement plans with employee-directed investments.

The participant’s underlying claim in the case relates to whether the fiduciaries with oversight of the investments of two of Intel Corporation’s retirement plans breached their ERISA duties on the ground that the funds in which the participant invested his plan benefits included excessive amounts of hedge funds and private equity, and as such, violated ERISA’s prudence requirement.

Intel argued that the participant’s action was time-barred by ERISA’s statute of limitations, which provides that, absent fraud or concealment, litigation based upon a claim of breach of fiduciary duty must be brought before the earlier of (1) six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation, or (2) three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation. To prevail, Intel had to establish that the participant possessed actual knowledge of the potential claim more than three years before the participant filed his lawsuit.

The issue to be decided by the Supreme Court is, what does it mean for a plan participant to have “actual knowledge” of a potential claim to start the running of the statute of limitations?

Importantly, numerous disclosures of the fund investments, which are the source of the participant’s alleged ERISA fiduciary breach, had been made prior to the date that would have cut off the statute of limitations. The 9th Circuit acknowledged that the disclosures were in multiple notices and fact sheets, as well as in the plan’s summary plan description and on websites that explained how the funds’ assets were invested, the strategy behind those investments, and possible risks. In fact, the 9th Circuit’s opinion specifically states that “[w]e agree that Intel’s evidence demonstrates that [the participant] had sufficient information available to him to know about the allegedly imprudent investments before October 29, 2012 [the date that was three years prior to the date that the participant filed his lawsuit].”

The participant stated that because he was unaware before October 29, 2012, that the funds he selected to invest his plan benefits in were invested in hedge funds or private equity, and that he was unable to recall having seen any of the notices or other information that would have let him know of such investments, he could not have had actual knowledge, as of that date, of the claim that he was seeking to litigate.

The 9th Circuit’s Decision

The 9th Circuit of Appeals, disagreeing with the 6th Circuit Court of Appeals in a separate but similar decision, declined to accept Intel’s argument that the participant’s claim was time-barred, and held that a plan participant does not have “actual knowledge” of relevant information about a retirement plan’s investments simply by virtue of all of the relevant information having been disclosed to the participant. Instead, the 9th Circuit concluded that disclosure of such information does not amount to actual knowledge of the information, even if the participant chose not to read or could not recall having read the information. In the judgment of the 9th Circuit, such disclosure only resulted in constructive knowledge, and not actual knowledge, within the contemplation of ERISA’s statute of limitations.

In effect, the 9th Circuit has ruled that, when it comes to 401(k) plan investment disclosure, the old saying “you can lead a horse to water, but you can’t make him drink,” does not provide a basis for successfully asserting that disclosing fund investment information to a participant, no matter how frequently and comprehensively that disclosure is made, results in the participant having actual knowledge of that information sufficient to trigger the running of the statute of limitations.

Consequences of a Decision in Favor of the Plan Participant

A decision by the Supreme Court in favor of the participant would have potentially significant negative ramifications for companies with 401(k) plans. Such a decision would mean that compliance with the Department of Labor standards for disclosing the investments in a 401(k) plan, which themselves are quite detailed and complex, is not sufficient to put a plan participant on actual notice, so as to begin the limitation period for a lawsuit under ERISA challenging the propriety of those investments. Faced with that eventuality, employers with 401(k) plans would predictably be left wondering what steps they would need to take to be deemed to have provided that “actual” notice. Further guidance as to what, if any, actions employers will need to consider must await the Supreme Court’s decision.

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